Measuring Trust in Social Networks Dean Karlan (Princeton University and Yale University) Markus Mobius (Harvard University and NBER) Tanya Rosenblat (Wesleyan University and IQSS) May 2005

What is Trust? – some common definitions “Firm reliance on the integrity, ability, or character of a person” (The American Heritage Dictionary) “Assured resting of the mind on the integrity, veracity, justice, friendship, or other sound principle, of another person; confidence; reliance;” (Webster’s Dictionary) “Confidence in or reliance on some quality or attribute of a person” (Oxford English Dictionary)

What is Trust? “Confidence in or reliance on some quality or attribute of a person” (Oxford English Dictionary) Define trust as my belief that another player is willing to sacrifice her utility to improve my utility.

What is Trust? “Confidence in or reliance on some quality or attribute of a person” (Oxford English Dictionary) Define trust as my belief that another player is willing to sacrifice her utility to improve my utility. Trust will arise most naturally in repeated interactions. Research Strategy – look at social networks.

Sources of Trust: 2. Cooperative: Enforcement Trust 2. Cooperative: Enforcement Trust 1. Preference-Based: Type Trust 1. Preference-Based: Type Trust

Sources of Trust: The other person is altruistic (or responsible, or kind) and takes my utility into account. 2. Cooperative: Enforcement Trust 2. Cooperative: Enforcement Trust 1. Preference-Based: Type Trust 1. Preference-Based: Type Trust

Sources of Trust: The other person is altruistic (or responsible, or kind) and takes my utility into account. Altruism can differ by social distance (have more information or feel differently towards friends, friends of friends, friends of friends of friends or strangers) 2. Cooperative: Enforcement Trust 2. Cooperative: Enforcement Trust 1. Preference-Based: Type Trust 1. Preference-Based: Type Trust

Sources of Trust: The other person is altruistic (or responsible, or kind) and takes my utility into account. Altruism can differ by social distance (have more information or feel differently towards friends, friends of friends, friends of friends of friends or strangers) The other person fears punishment in future interactions with me (or other players) if she does not take my utility into account. 2. Cooperative: Enforcement Trust 2. Cooperative: Enforcement Trust 1. Preference-Based: Type Trust 1. Preference-Based: Type Trust

Sources of Trust: The other person is altruistic (or responsible, or kind) and takes my utility into account. Altruism can differ by social distance (have more information or feel differently towards friends, friends of friends, friends of friends of friends or strangers) The other person fears punishment in future interactions with me (or other players) if she does not take my utility into account. Fear of punishment can differ by social distance (differently afraid of punishment from friends, friends of friends, friends of friends of friends or strangers) 2. Cooperative: Enforcement Trust 2. Cooperative: Enforcement Trust 1. Preference-Based: Type Trust 1. Preference-Based: Type Trust

Field Experiment Location – Urban shantytowns of Lima, Peru Trust Measurement Tool - a new microfinance program where borrowers can obtain loans at low interest by finding a “sponsor” from a predetermined group of people in the community who are willing to cosign the loan.

Types of Networks Which types of networks matter for trust? Survey work to identify  Social  Business  Religious  Kinship

Who is a “sponsor”? From surveys, select people who either have income or assets to serve as guarantors on other people’s loans for each community If join the program, allowed to take out personal loans.

Experimental Design 3 random variations:  Sponsor-specific interest rate Helps identify how trust varies with social distance  Sponsor’s liability for co-signed loan Helps separate type trust from enforcement trust  Interest rate at community level Helps identify whether social networks are efficient at allocating resources

Sponsor 1 r1 Direct Friend Direct Friend Direct Friend Direct Friend Sponsor-specific interest rate is randomized Indirect Friend 2 links Indirect Friend 3 links Random Variation 1

Sponsor 1 r1 Direct Friend Direct Friend Direct Friend Direct Friend Sponsor-specific interest rate is randomized Indirect Friend 2 links Indirect Friend 3 links Sponsor 2 r2 < r1 Random Variation 1

Sponsor 1 r1 Direct Friend Direct Friend Direct Friend Direct Friend Sponsor-specific interest rate is randomized Indirect Friend 2 links Indirect Friend 3 links Random Variation 1 Sponsor 2 r2 < r1 The easier it is to substitute sponsors, the higher is trust in the community. Should I try to get sponsored by Sponsor1 or Sponsor2?

Sponsor 1 r1 Direct Friend Direct Friend Direct Friend Direct Friend Sponsor-specific interest rate is randomized Indirect Friend 2 links Indirect Friend 3 links Random Variation 1 Sponsor 2 r2 < r1 Measure the extent to which agents substitute socially close but expensive sponsors for more socially distant but cheaper sponsors. Should I try to get sponsored by Sponsor1 or Sponsor2?

Sponsor 1 r1 Direct Friend Direct Friend Direct Friend Direct Friend Sponsor’s liability for the cosigned loan is randomized (after borrower-sponsor pair is formed) Indirect Friend 2 links Indirect Friend 3 links Random Variation 2 Measure the extent to which sponsors can control ex-ante moral hazard. (can separate type trust from enforcement trust by looking at repayment rates). Sponsor’s liability might fall below 100%

Community 1 Low r Community 2 High r Random Variation 3 Average interest rate at community level (to measure cronyism) Under cronyism, the share of sponsored loans to direct friends (insiders) increases as interest rate is reduced.

Field Work

Pilot Baseline Survey Work Pilot work has been conducted in 2 communities in Lima’s North Cone. The first community has 240 households and the second community has 371 households. Baseline census was applied to 153 households in the first community and 224 households in the second community. Social network survey has been applied to 185 individuals in the first community and 165 individuals in the second community. Social network survey work is ongoing.

Pilot Launch of Credit Program The sponsor-based lending model was launched in one community in late March. Since the launch, 40 members of this community have received a loan sponsored by one of 25 “sponsors” chosen from their own community. Of the 25 “sponsors” from the community, 64% (16 out of 25) have sponsored at least one loan. “Sponsors” who have participated have sponsored between 1 and 7 community members. The credit program has a portfolio of $21,000.

Timeline: Full Launch of Credit Program July – September 2005: Generate a database of 60 communities in Lima’s North Cone, in which the credit program could be applied July - August 2005: Evaluate results of Pilot Program, use results to revise survey instruments. July – August 2005: Gather and train large team of surveyors September December 2005: Baseline Survey work in 30 communities. January - April 2006: Staggered program launches in 30 communities

Presenting Credit Program to Communities in Lima’s North Cone

Survey Work in Lima’s North Cone

Characteristics of Sponsored Loans The average size of a sponsored loan is $317 or 1040 soles. The average interest rate for sponsored loans is 4.08%

Promotional Materials for Sponsors

Promotional Material for Clients

Research Tools

Surveyor

Pocket PC Applications