Cooperation in Microcredit Borrowing Groups: Identity, Sanctions, and Reciprocity in the Production of Collective Goods

Abstract

Cooperation to produce collective goods is widespread in society, and yet so is its failure. Theorists have identified competing mechanisms for facilitating group cooperation, including group identity, sanctions and reciprocity. Here I use empirical data to explore how these mechanisms influence cooperation in the natural laboratory of microcredit borrowing groups. Microcredit makes loans to high-risk borrowers through borrowing groups in which individuals' access to credit is dependent on the behavior of other members of the group, thereby creating a social dilemma for members and an opportunity to observe cooperation in real world groups. By analyzing both collective goods production (loans) and compliance (repayment), I find that the competing mechanisms have differential effects. Group identity, sanctions and reciprocity are all associated with more borrowing in the group. Only reciprocity, however, limits loan delinquency and is associated with group longevity, suggesting both that collective goods production is a distinct process from group compliance over time, and that reciprocity may be an important mechanism in both processes. I discuss how these findings contribute to our understanding of group cooperation, as well as the implications for the related theoretical concept of embeddedness.