Economic Sociology Workshop presentation by Roman Galerpin, Assistant Professor of Management at Johns Hopkins Carey Business School

Abstract:

Embeddedness research posits that economic exchange is often reinforced with social ties that alleviate the problem of trust. But embedded exchange may also be inefficient when market actors overcommit to their partners. We argue that overcommitment results, in part, from market stratification, which shapes actors’ outside options and influences their “broad search” attempts. We assess our theory in the context of consumer credit market, using data from a credit bureau on a national sample of individuals in the U.S. military, whose access to fringe lenders was disrupted by a federal regulation (the Military Lending Act of 2007, or MLA). Using variation across states in access to fringe loans prior to the MLA and conditionally random assignment of personnel to military bases, we estimate difference-in-differences models and find that, while credit scores of fringe borrowers did not change, their search for and access to mainstream credit increased post-MLA. Exchange with fringe lenders appears to have been limiting borrowers’ broad search for better alternatives in two ways: by increasing the likelihood of rejection by mainstream lenders and by strengthening the negative effect of each rejection on further search.