Can Social Cohesion be Harnessed to Repair Market Failures? Evidence from Group Lending in Guatemala
This paper tests the significance of three types of social cohesion on borrowing group performance, namely, peer monitoring, social ties and borrowing group pressure. The paper analyzes their effect on provision of intra-group insurance and mitigation of moral hazard within borrowing groups, using data from a survey of 137 borrowing groups in western Guatemala. Study findings include:
- Peer monitoring appears to be of primary importance in affecting group loan repayment;
- Effect of social pressure is limited to mitigation of moral hazard in rural borrowing groups;
- Social ties are found to have virtually no significant effect on borrowing group performance;
- Borrowing groups function as miniature insurance networks and juries, helping those with verifiable claims of hardship to repay loans, while threatening risky borrowers with expulsion.
The study states that if borrowing groups indeed function this way, previously existing social ties are unnecessary for group lending to yield high repayment rates. This finding underscores the importance of training sessions in which groups are given permission to expel members who are habitually tardy with payments, and offer aid to borrowers who have been victims of unavoidable mishap.
