Able but Unwilling to Enforce : Cooperative Dilemmas in Group Lending

Under what structural conditions does the ability to enforce economic cooperation outweigh thewillingness to enforce? We derive a framework from sociological theory in which the structuralforces that mitigate the first-order cooperative dilemma may simultaneously exacerbate the second-order dilemma. We then examine how two dimensions of structural embeddedness, (1) structural cohesion and (2) disconnected subgroups, shape the behavior of microfinance clients in Sierra Leone. Group lending provides an ideal empirical cooperative dilemma: if one member does not repay, the others are held financially responsible. We complement statistical modelling with ethnographic analysis in a nested research design, the highest level including 5,582 repayments made by 1,884 borrowers. The results clarify how different group structures determine which alternative enforcement mechanisms are likely to dominate collective outcomes. We find that structural cohesion consistently increases economic cooperation to a point, beyond which unwillingness to punish outweighs the benefits of increased ability, resulting in worse group repayment. In contrast, groups that consist of disconnected subgroups are more willing to punish defectors in the out-subgroup. However, they are less able to effectively sanction and overall performance suffers.Previous versions of this paper can be found at: "https://ssrn.com/abstract=3060569" https://ssrn.com/abstract=3060569 and "http://ssrn.com/abstract=2465634" http://ssrn.com/abstract=2465634