February 9, 2013 Organization Science Winter Conference XIX Steamboat, CO

1. A Matter of (Relational) Style:Coherence and Consistency in ContractEnforcement in MicrofinanceJasonGreenbergNYU-Stern& Rodrigo CanalesYale SOM February 9, 2013 Organization Science Winter Conference XIX Steamboat, CO

2. The theoretical puzzle • Substantialevidence of thevalue of social relationshipsfororganizations • Butthere’s a problemfororganizations: Relationships are betweenpeople • Iftieisbroken (e.g., employeeturnover), valueisoftenlost (e.g., Broschak 2004) • Yet, somehow (relational) valueiscapturedbyorganizations in a sustainablemannerdespitethischange • Howisthispossible?

3. Objectives of this paper • Provide a theoretical explanation of the continuity of organization-client exchange despite broken ties • Emphasis on consistencyand coherencein“relational styles” (modalities of dyadic interaction)

4. Summary of Argument • Formal contractbetweenclient and bank • Fortheclient: (relational) contractwithher loan officer • Social action is a function of individual’s understanding of those they interact and transact with—this needs to be taught/learnt • Relationshipsmatter • Relationalstyles of/betweenaltersmatter • Coherence (logicalinterconnectedness) and consistency (uniformity/regularity) • Organizations can capture value in theface of personnelchangebythinkingaboutthesestyles in staffing

5. Context and preview of findings • Microfinance in Mexico, 2004 - 2008 • When loan officers change, the odds of delinquency increase appreciably • Consistent with importance of embedded ties • The negative impact of change is mitigated when • Prior and subsequent loan officers have consistent enforcement styles • Especially if the styles are coherent • Prior loan officer had an incoherent enforcement style, subsequent officer has a coherent one

6. METHODOLOGY

7. Mixed data: Interviews, participantobservation, and quantitative • 129 interviews • Managers • Loan officers • Active and “drop out”clients • Participantobservation • Allloansgrantedbyonefirm (2004-2008) • > 400,000 loans • > 100,000 borrowers • ≈ 700 loan officers • Missedpayment(s) as dependent variable • Exogenousassignment of loan officers… • Loan officersrandomlyassignedtomarkets • Randomperiodicrotations: policyagainstcorruption

8. Key construct: Loan officerrelationalstyles • Somecontext: Officers use detailed, well-defined rules/policies • Creditscoringmodels • Comprehensivecredit and collectionmanuals • CRM systemsto define clienttasks • Handhelddevicestoautomatedecisions • Relationalenforcementstyles: • Spirit of theLaw (“makeitwork” • Letter of theLaw (“bythebook”) • Undefined (incoherent) • Regional managers validatedtypology and codedall loan officersbasedontypology • Inter-raterreliabilitygood • Saveforstyle, loan officershavesimilar backgrounds and responsibilities(tenure, degree, gender, loan size, interestrate) Coherent forms

9. findings

10. The null matters: Borrowers bound by contracts to pay on time • Formal agreement by and between client and lending institution • Coherence and consistency of loan officer relational styles should not matter • You owe what you owe • You’ve committed to pay on a fixed, pre-specified schedule

11. Yet changing loan officers increases probability of missed payment(s) ∆24% ∆43%

12. Missed payment(s) by loan officer enforcement style: Coherence matters

13. The impact of loan officer change varies by the successor’s style Change in LO NO change in LO

14. Summary: Consistency and coherence in relational styles matter • Consistency • When an officer changes the odds of a missed payment(s) increase • However, if there is a change in loan officer, the negative effect is mitigated if • The subsequent loan officer has a coherent relational style that is consistent with the predecessor’s • Coherence • Incoherent loan officers perform worst • Moving from an incoherent to coherent (e.g., letter, spirit) loan officer mitigates impact of change

15. Contributions • Demonstrate how organizations can capture value from relationships despite broken ties • Focus attention on the impact of relational style consistency and coherence above and beyond relational embeddedness • Contrast consistency (uniformity, regularity) and coherence (logical interconnectedness)

16. Discussion question • How can organizations (“higher” levels of analysis) consistently derive value from social relationships when those social relationships are generally maintained by corporate actors (“lower” levels of analysis) who often leave taking both their relationships and tacit knowledge with them?

17. Thankyou!jgreenbe@stern.nyu.edurodrigo.canales@yale.edu

18. Prior models do not control for other factors…

19. Alternative explanations: It’s about the loan/recipient/officer… Lender factors Loan-specific factors Interest rate Loan amount Size of scheduled payments Payment frequency Restructured loan Branch Loan officer • First loan • Client tenure (# of loan cycles) • Group loan • Business loan • Past delinquency • Gender Most importantly, loan officers periodically, and randomly, reassigned to loans

20. Full model predicting one delinquency Model controls for: Freq. btw. payments; LN(interest rate); gender; group loan; history of late payment; client tenure; client’s first loan; business loan; loan was restructured; year FEs; loan officer FEs; branch-level FEs

21. Full model predicting two or more delinquencies Model controls for: Freq. btw. payments; LN(interest rate); gender; group loan; history of late payment; client tenure; client’s first loan; business loan; loan was restructured; year FEs; loan officer FEs; branch-level FEs

23. Typology of loan officerenforcementstyles