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Social capital and enforcement of informal contracts in developing economies (SSD)
Start date: 01 Jan 2009, End date: 31 Dec 2013 PROJECT  FINISHED 

"In the absence of formal contracts and sanctioning agencies, many economic exchanges are based on informal arrangements that cannot be enforced through courts or monitored by external parties. In this project, we study the role of social capital in generating social sanctions that agents can use to enforce informal arrangements. Typically, in the literature, social sanctions are posited parametrically, and are supposed to be used unilaterally whenever there is a breach in the contract . They are thus conceived essentially as an instrument to sustain existing agreements. This argument however relies on unduly restrictive assumptions on the nature and the use of social sanctions: they are costless and they can be used only against defecting members. We intend to go beyond the literature by properly modelling what constitutes a social sanction, so as to provide stronger micro-foundations to this concept. We therefore intend to first investigate the mechanisms through which social capital, in the sense of dense interdependence between agents, generates social sanctions. In a second step, we will explore the impact of social sanctions in sustaining existing agreements, allowing sanctions to be used to force agents to renege on their obligations if such defection is beneficial to their particular group. To give an example, in the context of micro-credit, group members can use social sanctions to enforce repayment of the loan to the bank but, with appropriate norms and beliefs, they can also use the same sanctions to enforce collective default against the lending agency. At the theoretical level, we will explore the role of social sanctions in micro-credit groups, in collective action problems and in informal insurance arrangements. We shall also carry out two empirical projects based on original data sets: one on the evolution of microfinance groups in India, and the other on social sanctions and pressures for interpersonal redistribution in Cameroon."
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