The Role of Social Capital in Risk-Taking Decisions under Joint Liability Lending

Joint liability group lending has come under scrutiny for failure to promote profitable risk-taking among smallholder borrowers in developing countries. One possible explanation for the absence of profitable risk-taking is the collateral-like effect of social capital, which borrowers fear losing if they default. In this paper, we use data from a framed field experiment and a survey administered in Tanzania to empirically investigate the relationship between social capital and risk-taking. We find that borrowers with more close relationships (family and friends) in their borrowing group increase risk-taking yet borrowers with more relationships that induce negative moral emotions (shame and guilt) reduce risk-taking.