Community Membership and Reciprocity in Lending: Evidence from Informal Markets

79 Pages Posted: 30 Sep 2021

Date Written: September 29, 2021

Abstract

We study how wholesalers assess borrower credit risk and 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 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, are more lenient when these retailers default, and are less likely to experience defaults from them. Our analyses suggest that this cooperation between same-community wholesalers and retailers is achieved through an indirect reciprocity mechanism, which is sustained by within-community information flows and 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 (September 29, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-114, Available at SSRN: https://ssrn.com/abstract=3933157 or http://dx.doi.org/10.2139/ssrn.3933157

Rimmy Tomy (Contact Author)

University of Chicago ( email )

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

Regina Wittenberg Moerman

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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