Kinship and Financial Networks, Formal Financial Access and Risk Reduction
The importance of kinship networks in facilitating consumption smoothing and investment financing has been documented in many settings, but the channels through which networks matter are not well understood. We use detailed panel data on Thai households to study the financing devices used for consumption and investment by households with and without kin in the village. Households that are connected to commercial and government banks directly or indirectly, through borrowing from connected households, achieve significantly better smoothing of consumption than unconnected households, controlling for the presence of kin and the effect of net worth. Investment, on the other hand, appears to be financed through kinship networks and through government banks: households with kin in the village and with connections to government banks display reduced sensitivity of investment to income, while connections to commercial banks do not significantly reduce investment sensitivity. We test the hypothesis that kin networks facilitate large investment expenditures through the relaxation of collateral constraints by showing that the investment-smoothing benefit of kin networks is concentrated among households in occupations where the average investment size is high relative to net worth. Kin may act as implicit collateral permitting borrowing that cannot be collateralized with tangible assets.