The Economic Returns to Social Interaction: Experimental Evidence from Microfinance

The penetration of formal insurance among low-income populations in developing countries remains low. Under such circumstances, some researchers theorize, social capital can lead to better informal risk-sharing among households. By increasing the social ties between individuals, development organizations may be able to expand or deepen their informal risk-sharing networks and help the poor hedge against individual or household level-risks. Some experts believe that greater social capital can lead to other advantageous economic outcomes for the poor such as increased cooperation. For these reasons, many development organizations attempt to build social capital through programs that focus on community interaction and group activity. In this study, CMF researchers tested whether one development intervention that involves constant group interaction, standard microfinance lending, builds social capital. By closely tracking borrowing outcomes for groups that meet more frequently, researchers attempted to quantify the returns to enhanced social capital.