Community Membership and Reciprocity in Lending: Evidence from Informal Markets

80 Pages Posted: 28 Jan 2021 Last revised: 30 Jun 2022

See all articles by Rimmy E. Tomy

Rimmy E. Tomy

University of Chicago

Regina Wittenberg Moerman

University of Southern California

Date Written: June 29, 2022

Abstract

We study how wholesalers assess credit risk and extend trade credit to retailers in informal economies where market institutions, such as financial reporting systems, auditing, and courts, are nonexistent or function poorly. Using the setting of a large market in India, we find that community membership plays a strong role in the access to credit. Wholesalers are more likely to provide trade credit and to offer less restrictive credit terms to within-community retailers, and are more lenient when these retailers default. Our findings suggest that an indirect reciprocity mechanism explains within-community credit flows, as evidenced by wholesalers with low endowments, those with greater within-community information flows about them, and those facing income shocks being more likely to provide preferential lending to their community retailers. The importance of the indirect reciprocity mechanism is further supported by evidence on the help traders receive from their community members following the COVID-19–related income shock.

Keywords: Trade Credit, Informal Economies, Lending, Reciprocity, India, Iewduh, Community Enforcement, Asymmetric Information

JEL Classification: D82, G21, G28, O10, O16, O17, Z10, Z13

Suggested Citation

Tomy, Rimmy and Wittenberg Moerman, Regina, Community Membership and Reciprocity in Lending: Evidence from Informal Markets (June 29, 2022). Chicago Booth Research Paper No. 21-09, Fama-Miller Working Paper , Available at SSRN: https://ssrn.com/abstract=3773160 or http://dx.doi.org/10.2139/ssrn.3773160

Rimmy Tomy (Contact Author)

University of Chicago ( email )

Booth School of Business
5807 S Woodlawn Ave
Chicago, IL 60637
United States

Regina Wittenberg Moerman

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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