Able but Unwilling to Enforce: Cooperative Dilemmas in Group Lending

Abstract

It is known that greater social cohesion increases a group's ability to enforce cooperation. Despite this, defectors often go unpunished, and groups with social structures that are a priori favorable often fail. A critical distinction is required between the structural effect on ability versus willingness to punish. The authors develop a theoretical framework in which variation in a group's social structure generates a tension between ability and willingness to enforce cooperation. Structures that promote ability to punish also often reduce interest in carrying out sanctions, thus changing collective outcomes. The authors' empirical analysis involves a well-defined cooperative dilemma: group lending in Sierra Leone. They complement statistical modeling, based on a data set containing 5,487 group repayments, with ethnographic analysis. They find that (1) structural cohesion only increases economic cooperation between borrowers to a point, beyond which unwillingness outweighs increased ability to punish, reducing group repayments, and that (2) groups with disconnected subgroups perform worse on average. Although borrowers are more willing to punish defectors in the out-subgroup, they are unable to do so effectively.

Social ties, access to loans, and loan repayments in savings and loan associations: evidence from rural Tanzania

“…These findings show that relatives and friends do not want to be in dispute with other members. This argument is also in line with Sabin and Reed-Tsochas (2020) findings, providing mixed methods evidence from group-based lending schemes in Sierra Leone. They find that members of socially cohesive (tied) group members are unwilling to punish other group members when they do not repay their loans although they can punish them.…”

Banking on cooperation: an evolutionary analysis of microfinance loan repayment behaviour

“…We report associations as positive, negative or non-significant in accordance with the original authors' own most permissive significance cut-offs (p<0.1 in the majority of studies; SM1). In all studies, only monotonic relationships between predictors and repayment efficacy were analysed, except for two studies (Kolstad et al, 2017;Sabin and Reed-Tsochas, 2018), which reported an inverted U-shaped relationship between a predictor and repayment efficacy. Thus, in the results, "Inverted U" is reported as an extra category.…”

“…The observation that kinship can generate collusion (i.e., cooperation) within the loan group against the MFI suggests that other factors which increase within-group cohesion may similarly reduce repayment efficacy. For example, a decrease in repayment was observed in a microcredit program in Sierra Leone when groups were "too cohesive", measured by their geographical proximity (Sabin and Reed-Tsochas, 2018). When penalties by the lender are too small, cooperation for repayment at the loan-group level may be less relevant than cooperation at other levels, such as the household, neighbourhood, community or dyad.…”

“…The notion that repayment under JLL is a public good, requiring cooperation and collective action, has been put forward by some social scientists (Anthony, 2005;Guttman, 2007;Sabin and Reed-Tsochas, 2018;van Bastelaer and Leathers, 2006), but it is not always treated explicitly as such in group lending models. For example, the seminal economic model of group lending by Besley and Coate (1995) assumes that borrowers employ sanctions to oblige other group members to repay their shares, making repayment the self-interested choice.…”

Banking on cooperation: An evolutionary analysis of microfinance loan repayment behaviour

“…The notion that repayment under JLL is a cooperative dilemma requiring collective action has long been recognised by social scientists (Anthony, 2005;Guttman, 2007;Sabin and Reed-Tsochas, 2018;van Bastelaer and Leathers, 2006), but it is not always treated explicitly as such in group lending models. For example, the seminal economic model of group lending by Besley and Coate (1995) assumes that borrowers employ sanctions to oblige other group members to repay their shares, making repayment the self-interested choice.…”