Does Social Capital Matter? Evidence from a Five-Country Group Lending Experiment

Understanding effect of social capital on economic decision-making

This paper examines the effect of social capital on economic decision-making through a group lending experiment carried out in five countries, namely, India, Kenya, Guatemala, Armenia and the Philippines.The study, involving 1,554 participants in 259 experimental borrowing groups, carried out treatments for social homogeneity, group monitoring and group self-selection. An important finding from the study is that effects of different types of social capital are highly contextualized. Other findings include:

  • Societal trust has a positive and significant impact on group loan contribution rates;
  • Group lending appears to create as well as harness social capital;
  • Peer monitoring can have adverse as well as beneficial effects;
  • Low contribution rates resulted due to low expectations about the behavior of others;
  • Social capital can be created through repetitive and cooperative group effort.