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Empirical Economics

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13-05-2022

Choosing partners: selection priorities of joint liability group leaders

Author: Nicholas Sabin

Published in: Empirical Economics | Issue 1/2023

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Abstract

Joint liability credit groups are often formed through a self-selection process. Partner choice presents complex tradeoffs between behavioral expectations, risk diversification, monitoring, and enforcement. Most prior studies have found partner selection to be non-optimal financially. In this study, we explore social, spatial, economic, and demographic factors that may be driving the selection process. A unique analytical approach is used based on the selection order of partners in joint liability groups. We decompose a group leader’s sequence of partner invitations into a series of ranked choices. The results indicate that socially and spatially proximate members are likely to be prioritized in the selection process, even though other potential members may possess stronger financial traits, such as higher monthly sales or business equity. There is also evidence of early selection based on gender, marital status, children, and matching business type. The analysis suggests that partner selection may be driven by social incentives and the avoidance of strategic default. More broadly, this study suggests which factors are prioritized when actors have choice over whom to partner with in a social dilemma.

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Van Tassel (1999) developed a similar theoretical argument to Ghatak (1999) for assortative matching. Their models differ in that Ghatak allows for a general distribution of borrower types and arbitrary group sizes, whereas Van Tassel allows for variable loan sizes.

Qualitative evidence for this assumption, drawn from microcredit client interviews, is reviewed in the empirical section.

The model formulation in this study follows on Punj and Staelin (1978). One could consider alternative approaches for modeling the choice process, such as search-theoretic models (Rogerson et al. 2004) or non-expected utility theory models (Starmer 2000). The proposed random utility model is intended to serve as a useful approximation of a more complex phenomenon.

This research was approved by the Central University Research Ethics Committee at the University of Oxford.

Both versions (individual and relational) for some of the demographic variables are not included in the final model because of their high correlation.

Robust standard errors are used to reduce the risk of over interpreting effect significance.

When interpreting the results, note that the estimates are based on a limited choice set, consisting only of actual group members. For example, leaders may have a strong preference for members with a pre-existing business over members without a pre-existing business. However, all alternatives in the choice set include pre-existing businesses as a result of organizational requirements.

Concern of multicollinearity was analyzed with uncentered VIFs. Variables with high VIFs were removed and the models rerun. All variables in the reduced model had VIFs < 7.36 with a mean of 4.03. Substantive results were the same as those reported.

To further explore the validity of this interpretation, the relationship between the proportion of direct social connections and distance from the leader was examined. As hypothesized, the data show that the greatest proportion of social connections occur at near and far distance, with the lowest proportion at mid-distance. The difference in proportions is significant at p < 0.1.

To fit the model with an increasing number of interaction effects, it was necessary to remove less significant control variables.

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Title: Choosing partners: selection priorities of joint liability group leaders
Author: Nicholas Sabin
Publication date: 13-05-2022
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 1/2023
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-022-02249-x

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