Changes in Social Network Structure in Response to Exposure to Formal Credit Markets

95 Pages Posted: 24 Sep 2018 Last revised: 28 Dec 2020

See all articles by Abhijit V. Banerjee

Abhijit V. Banerjee

Massachusetts Institute of Technology (MIT) - Department of Economics

Emily Breza

Harvard University

Arun G. Chandrasekhar

Stanford University - Department of Economics

Esther Duflo

Massachusetts Institute of Technology (MIT) - Department of Economics; Abdul Latif Jameel Poverty Action Lab (J-PAL); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Bureau for Research and Economic Analysis of Development (BREAD)

Matthew O. Jackson

Stanford University - Department of Economics; Santa Fe Institute

Cynthia Kinnan

Northwestern University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 7, 2018

Abstract

We show that formal financial institutions can have far-reaching and long-lasting impacts on informal lending and information networks. We first study the introduction of microfinance in 75 villages in Karnataka, 43 of which were exposed to microfinance after we first collected detailed network data. Using difference-in-differences, we show that networks shrink more in exposed villages. Moreover, links between households that were both unlikely to ever borrow from microfinance are at least as likely to disappear as links involving likely borrowers. We replicate these surprising findings in the context of a randomized controlled trial in Hyderabad, where a microfinance institution randomly selected 52 of 104 neighborhoods to enter first. Four years after all neighborhoods were treated, households in early-entry neighborhoods had had credit access longer and had accumulated larger loans. We again find fewer social relationships between households in early-entry neighborhoods, even among those ex-ante unlikely to borrow. Because the results suggest global spillovers, which are inconsistent with standard models of network formation, we develop a new dynamic model of network formation that emphasizes chance meetings, where efforts to socialize generate a global network-level externality. Finally, we analyze informal borrowing and the sensitivity of consumption to income fluctuations. Households unlikely to take up microcredit suffer the greatest loss of informal borrowing and risk sharing, underscoring the global nature of the externality.

Keywords: Social Networks, Network Change, Network Formation, Network Evolution, Microfinance, Market Exposure, Favor Exchange, Social Capital

JEL Classification: D85, D13, L14, O12, Z13

Suggested Citation

Banerjee, Abhijit V. and Breza, Emily and Chandrasekhar, Arun G. and Duflo, Esther and Jackson, Matthew O. and Kinnan, Cynthia, Changes in Social Network Structure in Response to Exposure to Formal Credit Markets (September 7, 2018). Available at SSRN: https://ssrn.com/abstract=3245656 or http://dx.doi.org/10.2139/ssrn.3245656

Abhijit V. Banerjee

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Emily Breza

Harvard University ( email )

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Arun G. Chandrasekhar

Stanford University - Department of Economics ( email )

Landau Economics Building
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Stanford, CA 94305-6072
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Esther Duflo

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Room E52-544
Cambridge, MA 02139
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617-253-6915 (Fax)

Abdul Latif Jameel Poverty Action Lab (J-PAL) ( email )

Cambridge, MA
United States

HOME PAGE: http://www.povertyactionlab.org/

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

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United Kingdom

Bureau for Research and Economic Analysis of Development (BREAD) ( email )

Duke University
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United States

Matthew O. Jackson (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
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HOME PAGE: http://www.stanford.edu/~jacksonm

Santa Fe Institute

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Cynthia Kinnan

Northwestern University - Department of Economics ( email )

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Evanston, IL 60208
United States

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