Kin groups and reciprocity: A model of credit transactions in Ghana

This paper studies kinship band networks as capital market institutions. Membership in a community where individuals are dynastically linked has two effects on informal credit transactions. First, the non-anonymity of the dynastic link allows to sanction the defaulters' offspring and induce compliance even in short-term interactions (social enforcement). Second, preferential agreements can arise in which kin members condition their behavior on the characteristics of a player's predecessor, e.g., lend to the children of rich players, because they expect that others will do the same with their offspring (reciprocity). These effects are incorporated in an overlapping generations repayment game with endogenous matching between lenders and borrowers and tested using household-level data from Ghana. I wish to thank two anonymous referees, Abhijit Banerjee and Debraj Ray for their invaluable comments and suggestions. I also benefitted from the inputs of excellent research assistance. I am indebted to the Ghana Statistical service for making the data available to me and to Harold Coulombe for sharing information on the panel. Financial support from the Harvard-MIT RTG in Positive Political Economy, from CNR-ISFSE and from Bocconi University is gratefully acknowledged. The usual disclaimer applies. Ahwe-wo-da-bi ba na wahwe no.