A Matter of (Relational) Style: Loan Officer Consistency and Exchange Continuity in Microfinance

Abstract

Social scientists have long considered what mechanisms underlie repeated exchange. Three mechanisms have garnered the majority of this attention: Formal contracts, relational contracts, and relationally embedded social ties. Although each mechanism has its virtues, all three exhibit a common limitation: An inability to fully explain the continuation and stability of inter-temporal exchange between individuals and organizations in the face of change. Drawing on extensive quantitative data on approximately 450,000 microfinance loans made by an MFI in Mexico from 2004-2008 that include random assignment of loan officers, this research proposes the concept of “relational styles” to help explain how repeated exchange is possible in the face of personnel change. We define relational styles as systematically reoccurring patterns of interaction employed by social actors within and across exchange relationships — in this paper, between microfinance clients and loan officers. We show that relational styles that are consistent facilitate a clear understanding of expectations and thus exchange. We also demonstrate that consistency in the relational styles followed by successive loan officers mitigates the negative impact of a broken loan officer-client tie. This paper thus proposes and empirically tests a social mechanism based on relational styles that often accompanies relational embeddedness, but may also serve as a partial substitute for it.

Keywords: Microfinance, networks, relational contracts, relational embeddedness, development, Mexico, natural experiment