Community Membership and Reciprocity in Lending: Evidence from Informal Markets

65 Pages Posted: 28 Jan 2021 Last revised: 10 Mar 2021

See all articles by Rimmy E. Tomy

Rimmy E. Tomy

University of Chicago

Regina Wittenberg Moerman

University of Southern California

Date Written: January 25, 2021

Abstract

We study how wholesalers extend trade credit to retailers in economies where formal market institutions, such as financial reporting systems, auditing, and courts, are nonexistent or function poorly. Using the setting of a large market in the northeastern part of India, we find that community membership plays a strong role in the access to trade credit. Wholesalers are more likely to provide trade credit and offer less restrictive credit terms to within-community retailers, are more lenient when these retailers default, and are less likely to experience defaults from them. We show that this cooperation between same-community wholesalers and retailers is achieved through a reciprocity mechanism, which provides insurance against income shocks.

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 (January 25, 2021). 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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