Building Social Capital through Microfinance

We exploit experimental variation in repayment meeting frequency across microfinance groups to show that more frequent interaction among group members builds social capital and im- proves their financial outcomes. One year after the end of their first loan cycle, clients in groups which met more frequently exhibit greater cooperation when offered the choice of adding other group members in a lottery and thereby lowering own expected lottery payoff while increasing expected group payoff. We provide evidence that this reflects higher expectations of reciprocal behavior due to an improved ability to monitor each others' actions. In parallel with this, we also find that clients who met more frequently are less likely to default.