Cultural proximity and loan outcomes

Fisman, R J and Paravisini, D and Vig, V (2017) Cultural proximity and loan outcomes. American Economic Review (AER), 107 (2). pp. 457-492. ISSN 0002-8282

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Abstract

We present evidence that shared codes, religious 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 bank officers and borrowers from a bank in India, and a rotation policy that induces exogenous matching between officers and borrowers. Cultural proximity increases lending on both intensive and extensive margins and improves repayment performance, even after the in-group officer is replaced by an out-group one. Further, cultural proximity increases loan dispersion and reduces loan to collateral ratios. Our results imply that cultural proximity mitigates informational problems that adversely affect lending, which in turn relaxes financial constraints and improves access to finance.

Item Type: Article
Additional Information: © 2016 American Economic Association. Permission to make digital or hard copies of part or all of American Economic Association publications for personal or classroom use is granted without fee provided that copies are not distributed for profit or direct commercial advantage.
Subjects: C > Credit management
Subject Areas: Finance
DOI: 10.1257/aer.20120942
Date Deposited: 12 Dec 2016 17:07
Last Modified: 06 Feb 2017 15:54
URI: http://lbsresearch.london.edu/id/eprint/588

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