Kinship Networks Enhanced by a Formal Financial Intervention: Costly State Verification and the Thai Village Fund

Abstract

Transfers (gifts) among poor households play a crucial role in funding investment, a role amplified by a quasi-formal village fund program in 2001, especially for those with preexisting informal kinship ties. Moreover, we document financial regime shifts using maximum-likelihood estimation. Two exogenously incomplete regimes (saving only and lending/borrowing) dominated for the relatively poor before the village fund, but costly state verification, a less incomplete financial regime, dominates in the subsample of poor households connected via kinship to the village fund. The structurally-estimated verification cost of these households is also significantly lower than those without kinship after 2001, relative to before.

Keywords: Informal Network, Village Fund, Regime Shift, Costly State Verification

JEL Classification: D10, E44, G10, L14, O10