Cultural Proximity and Loan Outcomes
Coauthor(s): Daniel Paravisini, Vikrant Vig.
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We present evidence that shared codes, beliefs, ethnicity — cultural proximity — between lenders and borrowers improves the efficiency of credit allocation. We identify in-group preferential treatment using dyadic data on the religion and caste of officers and borrowers from a bank in India, and a rotation policy that induces exogenous matching between officers and borrowers. Having an in-group officer increases access to credit, reduces collateral requirements, and induces better repayment even after the in-group officer leaves. Further, proximity increases loan size dispersion in a group, and its effect diminishes with group heterogeneity and size. The results imply that cultural proximity mitigates informational problems that adversely affect lending.
Fisman, Raymond, Daniel Paravisini, and Vikrant Vig. "Cultural Proximity and Loan Outcomes." Columbia Business School, 2012.