Risk Coping, Social Networks And Investment In Rural Ghana

Abstract

This dissertation explores how informal social institutions and social networks affect investment and consumption decisions in Ghanaian villages. While informal institutions create opportunities for risk sharing, they may distort individuals' incentives to invest in public and private goods. I examine this issue using data from a year-long household survey and two field experiments conducted in 2009 in four small communities in Akwapim South District, a rural area in southern Ghana. The first paper presents the results of a field experiment measuring the willingness of individuals in rural communities to contribute to the financing of local public projects. The experiment tested two techniques to encourage contributions: a matching grant, and a provision point mechanism, both of which were found to be effective. Using detailed survey data on participants and their social networks, I examine what characteristics explain individuals' contribution decisions. I find that individuals who are more trusted by their peers contributed significantly more, but this result is not explained by status alone. On the contrary, new migrants to the community and individuals from minority ethnic groups donated more than individuals from the local ethnic group and those with a longer history in the community. Unlike its formal counterpart, informal insurance may actually limit individual initiative. Like an income tax, social obligations erode an individual's enjoyment of the returns from an investment, and may thereby distort their incentives to invest. The extent to which this taxation discourages risk-taking, entrepreneurship and investment is hitherto not well understood. In the second paper I use a field experiment to measure how social obligations to share resources affect the consumption, transfer and investment behavior of individuals in rural Ghana. I develop a theoretical model linking the characteristics of a household's social network to its decisions about investment and consumption. I then test the model using the results of a field experiment in which large prizes of cash and animals were allocated by lottery to randomly selected respondents. The results suggest the presence of an 'investment trap', whereby richer individuals are discouraged from making profitable investments because of the likely social taxation of gains from those investments.