Using Experimental Economics to Measure Social Capital And Predict Financial Decisions

Does behavior in games predict real financial status of MFIs?

This paper's key theme is to establish a direct link from the Trust Game to a propensity to overcome a market failure (i.e., loan repayment). The author conducts a trust game, a public goods game and conducts a survey to measure social capital.

The trust game, which is conducted between two players and an administrator, purports to measure:

  • How much one player (A) trusts another player (B), and how trustworthy is Player B with respect to Player A?

The author examines and finds that:

  • The General Social Survey's (GSS) questions on trust, fairness, and helping others can predict real financial decisions;
  • More positive answers to the GSS questions predict higher repayment and higher savings.

In the Public Goods game, the author assesses that:

  • Individuals who contribute more to this game are no more likely (or less likely) to repay their loans.

The paper concludes that:

  • A simple Trust game can predict repayment of a loan enforced almost entirely through social pressure and can be endorsed as a valid method to measure trustworthiness, though not as a method to measure trust;
  • Individuals identified as "trustworthy" by the Trust game are less likely to default on their loans;
  • Trustworthiness is an important component in determining the success of group lending programs. If harnessed and/or identified, lenders can help solve failures observed in the financial markets for the poor.

About this Publication

By Karlan, D.