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28 November 2005

Mobius on "Measuring Trust in Social Networks Through a Microfinance Field Experiment"

Markus Mobius will be speaking today on "Measuring Trust in Social Networks Through a Microfinance Field Experiment"

Monday, November 28, 2005
Bell Hall, Kennedy School of Government
12:00 - 1:30 p.m.

We propose a methodology to measure trust within a social network and apply it in a field experiment in shantytowns of Lima, Peru. We model trust as a transaction cost which an agent pays to gain permission to use someone else's asset. Social closeness reduces the transaction costs through two channels: (1) it reduces asymmetric information and makes it more likely that the asset's owner can identify the user as a 'good' responsible) type; (2) it gives the owner the ability to control the agent's use of the asset and hence reduce moral hazard.

We have designed a microfinance program where we invite a subsample of the Shantytown community to become 'sponsors'. Sponsors receive a line of credit and can use a fixed share of it to obtain loans for their own household. The rest of their credit line (the 'asset') is allocated for 'sponsoring'. Any household in the community can get a low-interest rate loan from our microfinance partner by finding a sponsor who agrees to cosign the loan application. We randomize interest rates across all client-sponsor pairs: this allows us to measure the tradeoff between accessing a socially close sponsor with a high interest rate and a socially distant sponsor with a low interest rate. A second randomization varies the extent to which a sponsor is responsible for a borrower's default which allows us to separate our two trust channels. In this paper we report early results from two communities. We find that social distance up to length three reduces transaction costs by about 1 to 4 percent in terms of monthly interest rates. Moreover, geographic distance is also highly significant.

Mp3 Podcast - Presentation PDF

Posted by David Lazer at November 28, 2005 10:03 AM

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