Community Membership and Reciprocity in Lending: Evidence from Informal Markets
65 Pages Posted: 28 Jan 2021 Last revised: 10 Mar 2021
Date Written: January 25, 2021
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: Suggested Citation