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A Matter of (Relational) Style: Coherence and Consistency in Contract Enforcement in Microfinance

Jason Greenberg NYU-Stern

& Rodrigo Canales

Yale SOM

February 9, 2013Organization Science Winter Conference XIX

Steamboat, CO

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• Substantial evidence of the value of social relationships for organizations• But there’s a problem for organizations:

Relationships are between people– If tie is broken (e.g., employee turnover), value is

often lost (e.g., Broschak 2004)

• Yet, somehow (relational) value is captured by organizations in a sustainable manner despite this change• How is this possible?

The theoretical puzzle

Objectives of this paper

• Provide a theoretical explanation of the continuity of organization-client exchange despite broken ties– Emphasis on consistency and coherence in

“relational styles” (modalities of dyadic interaction)

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Summary of Argument• Formal contract between client and bank• For the client: (relational) contract with her

loan officer• Social action is a function of individual’s

understanding of those they interact and transact with—this needs to be taught/learnt – Relationships matter– Relational styles of/between alters matter• Coherence (logical interconnectedness) and consistency

(uniformity/regularity)• Organizations can capture value in the face

of personnel change by thinking about these styles in staffing

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 5

METHODOLOGY

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Mixed data: Interviews, participant observation, and quantitative

• 129 interviews– Managers– Loan officers– Active and “drop out” clients

• Participant observation• All loans granted by one firm (2004-2008)– > 400,000 loans– > 100,000 borrowers– ≈ 700 loan officers

• Missed payment(s) as dependent variable• Exogenous assignment of loan officers…– Loan officers randomly assigned to markets– Random periodic rotations: policy against corruption

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Key construct: Loan officer relational styles

• Some context: Officers use detailed, well-defined rules/policies– Credit scoring models– Comprehensive credit and collection manuals– CRM systems to define client tasks– Handheld devices to automate decisions

• Relational enforcement styles:– Spirit of the Law (“make it work”

– Letter of the Law (“by the book”)

– Undefined (incoherent)

• Regional managers validated typology and coded all loan officers based on typology– Inter-rater reliability good

– Save for style, loan officers have similar backgrounds and responsibilities (tenure, degree, gender, loan size, interest rate)

Coherent forms

FINDINGS

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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

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Yet changing loan officers increases probability of missed payment(s)

No change Change10%

15%

20%

25%

30%

35%

40%

45%

31%

39%

15%

22%

One Two or more

∆24%

∆43%

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

Spirit Letter Undefined10%

15%

20%

25%

30%

35%

40%

32% 30%

35%

13% 14%

20%

One Two or more

∆43%

∆17%

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The impact of loan officer change varies by the successor’s style

Incoherent-->coherent Consistent style Consistently incoherent Coherent-->incoherent10%

15%

20%

25%

30%

35%

40%

45%

50%

34%35%

40%

45%

16% 17%

25%28%

OneTwo or more

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Change in LO

NO change in LO

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 change14

Contributions

1. Demonstrate how organizations can capture value from relationships despite broken ties

2. Focus attention on the impact of relational style consistency and coherence above and beyond relational embeddedness

3. Contrast consistency (uniformity, regularity) and coherence (logical interconnectedness)

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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?

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Thank you!

jgreenbe@stern.nyu.edu

rodrigo.canales@yale.edu

PRIOR MODELS DO NOT CONTROL FOR OTHER FACTORS…

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Alternative explanations: It’s about the loan/recipient/officer…

Lender factors• First loan• Client tenure (# of loan

cycles)• Group loan• Business loan• Past delinquency• Gender

Loan-specific factors• Interest rate• Loan amount• Size of scheduled

payments• Payment frequency• Restructured loan• Branch • Loan officer

Most importantly, loan officers periodically, and randomly, reassigned to loans 19

Full model predicting one delinquencyVariable Coef. /(SE)

Changed officer 0.373(0.015)***

Spiritspirit -0.176(0.034)***

Spiritletter -0.147(0.036)***

LetterLetter -0.153(0.043)***

LetterSpirit -0.143(0.042)***

UndefinedSpirit -0.21(0.023)***

UndefinedLetter -0.206(0.028)***

CONTROLS YES

Chi-Square 49,940***

N 438,247

-0.10 0.10 0.30 0.50 0.70 0.90 1.10 1.30 1.50

0.81

0.81

0.87

0.86

0.86

0.84

1.45

Odds-ratios

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 20

Full model predicting two or more delinquencies

Variable Coef. /(SE)

Changed officer 0.537(0.019)***

Spiritspirit -0.222(0.044)***

Spiritletter -0.117(0.045)**

LetterLetter -0.067(0.054)

LetterSpirit -0.141(0.055)**

UndefinedSpirit -0.271(0.03)***

UndefinedLetter -0.2(0.035)***

CONTROLS YES

Chi-Square 49,940***

N 437,665

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60

0.82

0.76

0.87

0.94

0.89

0.80

1.71

Odds-ratios

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

TABLE A1 CROSS-TABULATION AND TEST OF DIFFERENCES IN LOAN OFFICER CHARACTERISTICS BY

ENFORCEMENT RELATIONAL STYLE

T-Test of Difference in Means: Significantly different

Loan Officer Type Spirit Letter Undefined S - L S - U L – UTenure (Days) 971.93 948.66 930.69 no no noTotal Branch Rotations 5.30 5.19 5.88 no no noLeft Firm (%) 0.54 0.58 0.57 no no noLeft Firm (Days) 925.72 1064.83 968.69 no no noTime in First Branch (Months) 10.92 9.11 8.90 no yes no

Technical Degree 0.09 0.07 0.10 no no noCollege Degree 0.70 0.64 0.68 no no noGender 0.43 0.44 0.36 no no noAge 28.15 26.67 26.75 yes yes noMarried 0.36 0.30 0.26 no yes noAverage Loan Amount 8.70 8.27 8.51 no no noAverage Interest Rate 81.24 81.32 81.21 no no noSource: Unique dataset of ≈450,000 microfinance (SBE) loans made in Mexico, 2004 -2008

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Typology of loan officer enforcement styles

Rule “Spirit of the law” “Letter of the law”

-Loan officers should maintain an institutional relationship with clients. Clients should see the LO as the institution, not as the person

- Relationships with clients at a personal level-Emphasizes personal character of relationship with client while constantly referring back to company as “the boss” or “company policies”

- Relationships with client at an institutional level-Emphasizes professional character of relationship, constantly highlighting the fact that he/she only represents the company and its investors

- LO should know the status of the client’s business in terms of its profitability

- Close follow-up of business as well as personal activities, family issues, friendships, etc.

- Interaction mostly on a transactional basis, limits interaction to credit-related issues and business liquidity