Intermediate Development Economics (EC2303)

Stockholm University
Fall 2021

An Extended Analysis &

Replication of

The Diffusion of
Microfinance

Date:
October 15, 2021
Authors

ABHIJIT BANERJEE ESTHER DUFLO

Ford International Professor Abdul Latif Jameel Professor
of Economics at MIT of Poverty Alleviation and
Development Economics at
MIT

MATTHEW O. JACKSON ARUN G. CHANDRASEKHAR

William D. Eberle Professor of Associate Professor of Economics at
Economics at Stanford Stanford University
University

Diffusion of
Microfinance
Part 1:

Purpose &
Background
Diffusion of
Microfinance
This paper
tries to
understand...

How does the self-organized network structure of a society affect information

propaganda?
What determines behavior: pure access to information or complementary
relations?
How much effect do endorsement and peer influence have on these networks?
Is access to information an underdog?

Diffusion of
Microfinance
Background
75 rural villages in Karnataka, relatively isolated
from microfinance or any other banking facilities
initially.

BSS (Bharatha Swamukti Samsthe) entered 43 of

them and offered microfinance; treatment group.

Researchers surveyed villages before BSS' entry,

observed network structure, and various
demographics.

These 43 villages were tracked of microfinance

participation over time.

Diffusion of
Microfinance
 What affects the diffusion of

Possibilities information? We need to see this from

both the macro as well as the micro
perspectives.

Diffusion of
Microfinance
Macro
Network Structure: its
characteristics, density,
segregation, etc.

Initial injection points: same as

advertisement or marketing -
why do "who is endorsing"
really matter?

Diffusion of
Microfinance
Micro
Homophily effects: choose some action
because of characteristics, network
irrelevant but appears correlated.
(Jackson et.al)

Information Passing about a product if

neighbor uses it.

Peer influence: if informed, more

neighbors taking action leads to
higher/lower action...peer pressure for
example.

Diffusion of
Microfinance
 Diffusion studies are usually "single" network - here 43 networks.
Also has the diffusion of economic behaviour over time ( here,
how loan take-up rate changes over time).
Data Set 13 types of relationships in each detailed socio-economic
background, geography, known as injection points...these

Features combinations allow identifying the network effects.

Favour Networks:
- both borrow and lend money
- both borrow and lend kerosene/rice
Social Networks:
- both visit each other
- friends (talk together most)
- goes to the temple, medical help, etc.
It also Microfinance participation by individual, time
No. of households and their composition
Demographics: age, gender, subcaste, religion,
includes... profession, education level, family.
Wealth variables: a latrine, number of rooms, roof
Self-help Group participation rate, ration card,
voting.
Caste : higher castes/OBC/SC/ST
Part 2:

Modeling &
Analysis
Diffusion of
Microfinance
 Two-Part
Modeling &
Analysis
Part 1: Reduced Form Analysis
- Role of network structure: injection points

Part 2: Structural Model Fitting

- Sort information from peer effects
- Examine the role of non-participants

Diffusion of
Microfinance
 Hypothesis 1: If initially contacted points have a higher degree of centrality,
then there should be higher participation. ( Katz Lazersfeld (1955), Coleman
Katz Menzel, (1966)

What affects diffusion?

Identification strategy: 43 different
villages, each with its own networks.
(Endogeneity related to unobserved
characteristics? Control for
characteristics we can observe).
Injection points: Strategy of BSS was
to identify specific types of people,
and their position in the network
Diffusion of
Microfinance varies.
Degree Centrality and
Diffusion
Centrality: One possibility- simply
count how many links a node has.
Degree centrality: More reach if
connected to a 6/7 than a 2/3?
 Hypothesis 2: If initially contacted points have a eigenvector centrality, then
there should be higher participation. ( Slightly directed in Ballester Calvo-
Armengol Zenou, 2006).

Eigenvector Centrality

Eigenvector centrality
distinguishes more
"influential" nodes.
Example: Google
Literary page ranks,
random surfer models,
Diffusion of etc.
Microfinance
 7>5
BUT
14 < 25
7 Degree centrality 5

14 Eigenvector centrality 25

A higher degree of centrality doesn't guarantee a higher chance of information

passing...who > how many!
No relation between the degree of leaders and microfinance take-up rate
 Our Extended Analysis (Contd.)
TAKING INDIVIDUAL VARIABLES AND ALL 73 VILLAGES OVER 5 TIMES (325 OBSERVATIONS)
There's no significant correlation between the eigenvector centrality of leaders and other
independent variables. So we can say that the network characteristics are exogenous.


When all the variables are introduced together, no network characteristics are
significant.
Hypotheses
1) Villages, where nodes/leaders have
a higher degree of centrality, should
have higher participation.

2) Villages, where nodes/leaders

have a higher eigenvector centrality,
should have higher participation.
Modeling Diffusion We know the set of initially informed nodes.
Informed nodes (repeatedly) pass information randomly to their
(Structural Estimation) neighbors over discrete times.
Once informed (just once), nodes choose to participate
depending on their characteristics and their neighbors' choices.
So how to calculate the choice decision?

Diffusion of
Microfinance
Choice
Decisions

Diffusion of
Microfinance
 Estimate b0, bchar, from initially
informed.
q^N, q^P, bpeer - For each choice
parameter, simulate the actual
Estimation networks of the villages for a time
period proportional to the number of
Techniques trimesters in data for the village (3 to 8
times) [4 months].
Choose parameters to best match
simulated participation rates and
various moments to observed moments
(Generalized method of moments).

Diffusion of
Microfinance
Part 3:

Conclusion &
Final
Takeaways
Diffusion of
Microfinance
 Significant information
passing parameters

Insignificant, limited
peer effects

Results from
fitting models Information passing

of diffusion
depends on whether
they participate or not
participate: more likely
if participates

Non-participants play a
Diffusion of substantial role (1/3 of
Microfinance total)
Conclusion
1 2 3

Density, clustering, Injection points matter: Information passing

homophily, not important but Eigenvector centrality of significant, peer effects not.
the size of the network, etc. leaders matter and
increasingly over time.

4 5 6

Individual information There are many non- This study produces

passing is significantly participants, who account for rigorous correlation analysis
related to participation 1/3 of eventual information but not causation.
decisions. diffusion and participation.

Diffusion of
Microfinance
 General Points
Networks:
Basic statistics may not matter when
done enough.
The structure still matters: eigenvector
centrality mattered here rather than
betweenness/degree.
Injection Points matter and we need more
theory on this topic.
Diffusion modeling
Important to model both information and
peer effects.
This is not a complete blueprint of
infection model: non-participants
communicate which is different in
epidemiology.
Diffusion of
Microfinance
 The original paper

To learn more about social and economic

networks: A MOOC by Matthew O. Jackson,
also available on Coursera
Free
Resource Pages Method of Simulated Moments: Free
OpenCourseware from MIT.

Websites of Matthew O Jackson and

Benjamin Golub. Full of golden resources
on such studies!
Questions
Please!