Fisman, Raymond, Paravisini, Daniel and Vig, Vikrant (2016) Cultural proximity and loan outcomes. Financial Markets Group Discussion Papers (759). Financial Markets Group, The London School of Economics and Political Science, London, UK.
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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.
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