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The Role of Social Capital in Risk-Taking Decisions under Joint Liability Lending

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posted on 2020-05-13, 08:06 authored by Richard A. Gallenstein, Jon Einar Flatnes, Abdoul G. Sam

Joint liability group lending has come under scrutiny for failure to promote profitable risk-taking among smallholder borrowers in developing countries. One possible explanation for the absence of profitable risk-taking is the collateral-like effect of social capital, which borrowers fear losing if they default. In this paper, we use data from a framed field experiment and a survey administered in Tanzania to empirically investigate the relationship between social capital and risk-taking. We find that borrowers with more close relationships (family and friends) in their borrowing group increase risk-taking yet borrowers with more relationships that induce negative moral emotions (shame and guilt) reduce risk-taking.

Funding

This work was supported by the United State Agency for International Development and was provided as a sub-award from the Feed the Future Tanzania Project, Innovative Agricultural Research Initiative (iAGRI).

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