Network effects in risk sharing and credit market access: evidence from Istanbul

Abstract

Low levels of per capita income, variable incomes, and high unemploymentrates are some of the main economic problems that households living in developing countries face. When health expenditures, debt repayments, and educational costs are added, households face great difficulties in smoothing consumption. Although full insurance is not observed, many studies showthat households in rural areas are able to smooth consumption to a certain extent using their social networks as risk pooling instruments, when formal credit institutions fail to exist, or function properly. In contrast to the current literature, this study uses data from a household survey prepared for this study and conducted in Istanbul, where formal credit institutions are available, to analyze the household behavior in response to income and expenditure shocks. Our results indicate that households eligible for formal loan view money transfers from their social networks superior to formal loan. Moreover, networks are found to play an important role in households̕ accessto formal credit institutions.