Reputation, Trust and the Logic of Group Lending

Abstract

This paper analyzes the interaction between the success of group lending institutions and the stock of social capital (modeled by the level of trust) in the community where the group lending programs are located. Agents play a finitely repeated “trust game” in parallel with a finitely repeated “microcredit game.” There are two agent types: “regular” and “trustworthy,” and these types are private information. Moral hazard problems are present in both games. The model shows that there are conditions under which the presence of trust as an equilibrium of the trust game can enhance the success of the group lending program. Similarly, there are conditions under which success of the group lending program can enhance the development of trust.

Keywords: Microfinance, Microcredit, Group Lending, Social Capital, Trust, Reputation

JEL Classification: D02, O12, O16, O17, Z1