Familiarity Breeds Contagion
71 Pages Posted: 7 Jan 2020 Last revised: 27 May 2020
Date Written: May 23, 2020
Using the Indian caste system and the group loan structure where members screen and monitor each other, we ask whether social ties impede or improve loan performance. The borrowers belonging to caste homogeneous groups default more not because of occupational similarity within castes. We rule out self-selection into caste homogeneous groups and easier coordination within castes leading to higher strategic defaults as explanations. Our results show that contagion arising due to social connections, independent of common occupational shocks, offsets informational and relationship advantages, resulting in more delinquencies. Accordingly, in sub-samples where caste based contagion is less likely, caste homogeneous groups actually default less.
Keywords: Caste; Social Networks; Group Loans; Information; Contagion
JEL Classification: D82, G21, Z13
Suggested Citation: Suggested Citation