The Equation: NFTs and the Power of Social Influence
An explanation of the dynamics driving demand for some collections but not others.
The Equation: NFTs and the Power of Social InfluenceShutterstock / Iulian Ursachi
When business owners need credit, what is the likelihood they will repay the loan and what recourse does a lender have if a borrower defaults? In many economies, transparent financial reporting, impartial auditing, and effective courts help address these questions and keep commerce humming. But where these supports don’t exist, community plays an important role in credit access, research suggests.
Chicago Booth’s Rimmy E. Tomy and University of Southern California’s Regina Wittenberg-Moerman studied how trade credit is used among wholesalers and retailers at a large, old marketplace that lacks many market institutions governing finance. They conclude that community plays a strong role in credit access, providing information and some measure of insurance against default.
The researchers studied merchants at Iewduh, a giant bazaar in northeastern India that is one of the region’s oldest and largest traditional markets and trade centers. Most retailers operating there—selling everything from footwear and appliances to textiles, tobacco, and betel leaves—rely on trade credit from wholesalers. The market hosts multiple products and ethnic communities, and is in many ways similar to bazaars that exist across the world, the researchers write.
They interviewed 146 wholesalers who provide trade credit and 357 retailer borrowers, creating a data set that reflects 1,230 wholesaler-retailer relationships. For each trading link, the researchers collected data on trade-credit decisions, including terms, responses to defaults, information collected by lenders, and characteristics of the link, such as length of the relationship. They also recorded gender, age, education, years in operation, and other demographic information.
The researchers provide evidence suggesting that an indirect reciprocity mechanism explains the cooperation between wholesalers and retailers from the same community.
Trade credit, they find, is used widely. Almost three-quarters of all trading links involved extending or accepting some amount of lending. When such lending wasn’t offered or received, there were common reasons, including past nonpayment, distance between the wholesaler and a retailer’s shop, lack of trust, a policy of not giving credit to anyone, and, among retailers, infrequent visits to the wholesaler’s shop.
Community, the research suggests, plays a strong role in the decision of whether or not to offer credit, and how much. Wholesalers were 12 percent more likely to provide trade credit to retailers from their own community and extended 8 percent more credit to them. Wholesalers were also 14 percent less likely to experience defaults from same-community retailers. However, in the event of failure to pay, they were also less likely to repossess goods, deny future credit, or take other actions against retailers within their ethnic community.
The researchers provide evidence suggesting that an indirect reciprocity mechanism explains the cooperation between wholesalers and retailers from the same community. This cooperation, they write, is a response to income instability and a lack of formal sources of insurance. Consistent with this, traders who are in a weaker position and who are more dependent on their community in times of need are more likely to cooperate.
Tomy and Wittenberg-Moerman conclude that in areas lacking formal reporting and resolution systems, an indirect, community-driven reciprocity mechanism may fill in and enable access to credit. And when they conducted follow-up interviews with the traders, they found the same mechanisms appeared to be at work following the region’s COVID-19-related lockdown.
Rimmy E. Tomy and Regina Wittenberg-Moerman, “Community Membership and Reciprocity in Lending: Evidence from Informal Markets,” Working paper, September 2021.
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