Optimizing Microfinance Groups for Microenterprise: The Power of Social Networks

Over the last two decades, joint liability microcredit has attempted to massively expand credit access to the poor. Yet, the results have been mixed: groups exhibit over-conservatism in their investment decisions, entrepreneurship is low, and delinquency is still often quite high. Research even suggests that the very peer relationships used to sustain repayment behavior may stifle growth-enhancing activities. In this project, we are interested in studying a first-order question in credit provision for micro-entrepreneurs. What is the optimal organization of joint liability groups in order to spur investments in business and encourage entrepreneurship? To do this, we will take detailed measurements of a microfinance organization’s potential clients’ social networks – the web of social, informational and financial relationships between each other. Then we will conduct a 2x2 randomized controlled trial. Half of the individuals will be randomly assigned to a joint liability loan group whereas the other half of the clients will be able to choose their partners. Cross-cutting this, half of our groups will engage in simultaneous loan disbursement whereas the other half will face staggered loan disbursement. With this data we will be able to identify exactly what network relationships between parties in a group give rise to the most favorable behavior in terms of delinquency and business investment.