Changes in Social Network Structure in Response to Exposure to Formal Credit Markets

We study how the introduction of microfinance changes the networks of interactions among 16476 households in 75 Indian villages, and develop a new dynamic model of network formation to explain the empirical findings. None of the villages were exposed to microfinance by 2006, and 43 villages were through 2010. Using a two-wave panel of network data collected in 2006 and 2012, we compare changes in networks in villages exposed to microfinance relative to those not exposed. Networks exposed to microfinance experience a significantly greater loss of links --- for credit relationships as well as advice and other types of relationships --- compared to those not exposed. Microfinance not only results in decreases in relationships among those likely to get loans, but also decreases in relationships between those unlikely to get loans. These patterns are inconsistent with models of network formation in which people have opportunities to connect with whomever they wish, but are consistent with a model that emphasizes chance meetings that depend on relative efforts to socialize coupled with conditional choices of whom to connect with, as well as externalities in payoffs across relationships between pairs and triples of people