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Cultural proximity and loan outcomes

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We present evidence that shared codes, religious beliefs, ethnicity-cultural proximity- between lenders and borrowers improves the efficiency of credit allocation. We iden- tify 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 in- duces quasi-random matching between officers and borrowers. Cultural proximity increases the intensive and extensive margins of lending, and reduces the collateral rate. Ex post, cultural proximity increases repayment performance, even after the in-group officer is replaced by an out-group one. The results suggest that the in- formation benefits of cultural proximity may outweigh the misallocation costs of taste-based discrimination.

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