DP3705 | Kin Groups and Reciprocity: A Model of Credit Transactions in Ghana

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01/02/2003

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Abstract

This Paper studies kinship-band networks as capital market institutions. It explores two of the channels through which membership in a community where individuals are genealogically linked, such as a kin group, can affect their access to informal credit. The first is that incentives to default are lower for community members who can expect retaliation to fall on their offspring as well as on themselves (social enforcement). The second is that lenders prefer to lend to those members from whom they can expect reciprocation in the form of future loans for themselves or for their children (reciprocity). The possibility to engage in reciprocal transactions affects the terms of the loans in nontrivial ways. The social enforcement and reciprocity effects are incorporated in an overlapping generations repayment game with endogenous matching between lenders and borrowers, and are tested using household-level data from Ghana.