Cultural Proximity and Loan Outcomes

Fisman, R J, Paravisini, D and Vig, V (2017) Cultural Proximity and Loan Outcomes. American Economic Review, 107 (2). pp. 457-492. ISSN 0002-8282 OPEN ACCESS

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.

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Item Type: Article
Subject Areas: Finance
Additional Information:

Vikrant Vig gratefully acknowledges financial support from the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation programme (grant agreement No. 679747).

© 2016 American Economic Association.

Funder Name: European Research Council
Date Deposited: 12 Dec 2016 17:07
Date of first compliant deposit: 29 Nov 2016
Subjects: C > Credit management
Last Modified: 21 Sep 2021 00:22
URI: https://lbsresearch.london.edu/id/eprint/588
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