Kinship And Household Informal Finance:Effects And Mechanism

As a social network, kinship network become one of the most important and stable rural network, due to "Pattern of Difference" in China rural society. However, research on direct impact of kinship network is relatively limited. Related discussions focused on kinship network’s impact on rural enterprises, entrepreneurial farmers, interaction with formal institution. There is still a lack of specific literature research on what’s the role kinship network played in household finance. Based on the unique dataset covering kinship network and household debts, this paper systematically analyzes how kinship network impacts household participation in informal finance.The cores of this paper are as follows:(1) attempts to measure the scale and cohesion of kinship network; (2) empirically examines the influence of the clan network on household participation in informal finance; (3) examines the weakening trend existing in terms of the impact of kinship network on informal finance; (4) explores the potential mechanisms through which kinship network impacts informal finance.With reference to previous research, this paper uses "Is there a blood kinship network within the community/village" and "Is there an ancestral hall within the community/village" as proxy indicators to measure the scale and cohesion of kinship network.In the empirical part, the results of benchmark regression show that kinship network plays a significant role in promoting household informal finance. Associated with strong kinship network, families are more likely to participate in informal finance, with the probability of about 13% higher than other families. Meanwhile, kinship network has a significant inhibitory effect of household formal finance, the probability of participation in the formal financial borrowings decreased by about 16%. This indicates that kinship network has the asymmetric impacts on informal finance and formal finance, and relationship of competition and substitution between them still exists.In the further study, we found that there are significant differences in kinship network that impact different age-headed households. To be specific, along with the urbanization and the loss of the rural population, promoting role of kinship network on informal finance is more obvious in elderly-headed households.The function mechanism of the kinship network has not been fully verified in the existing literature. From three perspectives of supply, demand and interaction between them, this paper exploratory put forward three possible mechanisms and examines them respectively based on the dataset about potential borrowing channels, implicit costs and level of trust in different groups. Our results showed that:(1) Scale of kinship network helps broaden the sources of fund. It matters in relatives borrowing. However, no significant impact was found in terms of channels of formal financial institutions and professional informal borrowing organizations. (2) The stronger the kinship network, the lower implicit costs of informal financial borrowing pay. So kinship network can lower the transaction cost of informal finance to make it preferred than formal one. (3) Limited-trust radius effects exist, namely kinship network can facilitate the development of private trust (short radius), while suppressing social trust (long radius). This leads to the development of informal financial debts and lack of participation in formal financial debts.Finally, in the robust test, this paper made two attempts. Running regression by group of provinces and using an alternative proxy, genealogy, to measure kinship network, so as to verify the robustness of the conclusions of the article.