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Cultural Proximity and Loan Outcomes

  • Raymond Fisman
  • Daniel Paravisini
  • Vikrant Vig
American Economic Review
vol. 107, no. 2, February 2017
(pp. 457-92)
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Abstract

We present evidence that cultural proximity (shared codes, beliefs, ethnicity) between lenders and borrowers increases the quantity of credit and reduces default. We identify in-group lending using dyadic data on religion and caste for officers and borrowers from an Indian bank, and a rotation policy that induces exogenous matching between them. Having an in-group officer increases credit access and loan size dispersion, reduces collateral requirements, and induces better repayment even after the in-group officer leaves. We consider a range of explanations and suggest that the findings are most easily explained by cultural proximity serving to mitigate information frictions in lending.

Citation

Fisman, Raymond, Daniel Paravisini, and Vikrant Vig. 2017. "Cultural Proximity and Loan Outcomes." American Economic Review, 107 (2): 457-92. DOI: 10.1257/aer.20120942

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
  • G28 Financial Institutions and Services: Government Policy and Regulation
  • O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
  • Z12 Cultural Economics: Religion
  • Z13 Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification