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Social proximity and loan outcomes: evidence from an Indian bank

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We present evidence that social proximity between lenders and borrowers improves loan outcomes. We identify in-group preferential treatment using dyadic data on the religion and caste of bank officers and borrowers from a bank in India, and a rotation policy that induces quasi-random matching between officers and borrowers. Social proximity increases the intensive and extensive margins of lending, and reduces the collateral rate. Ex post, social proximity increases repayment performance, even after the in-group officer is replaced by an out-group one. The results suggest that the information benefits of social proximity may outweigh the misallocation costs of taste-based discrimination.

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en

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http://eprints.lse.ac.uk/43117/

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