Paper short abstract:

Using gameplay, we map the strength of within-in group networks and significant external networks for members of microcredit groups in rural India. We use this data to test the theoretical result that strength of social ties matters for contract enforcement in group-lending.

Paper long abstract:

We examine if strength of the networks among members of borrower groups matters for contract enforcement in microcredit schemes. We use gameplay with members of the microcredit groups to map in detail the strength of the actual within group ties as well as map significant external networks. This enables us to construct a social ties index for the group and a measure for the strength of each group member’s within-group and external connections. We then collect data on actual and potential defaults that the group experienced and note the action taken by the leader/committee in each case.

For 79 microcredit groups in rural Telangana India, we record the actions taken in 268 potential/actual default cases. We find that strong networks help with contract enforcement, but not always via sanctions. Strong groups may enforce contract by being supportive, which is likely to enhance the shared social capital of the group. Further, we find that the leader's ability to enforce contract is positively related to her social ties but negatively related to the ties of the defaulting member. This result is especially strong for member’s external networks. External validation for our results comes from an independent evaluation of groups by bank managers, who tend to rank groups with strong networks as more successful when compared to groups with weaker networks. Our results indicate that strong within group networks matters for contract enforcement in microcredit schemes and choosing a leader with the strongest overall social ties may matter for the success of joint liability.