Familiarity Breeds Contagion ∗

Abstract

Although the literature has studied the impact of social ties on credit markets, the possibility of social relations causing contagion remains unexplored. We study the Indian caste system and the group loan structure, where members screen and monitor each other. Using loan‐month level data provided by a nonbanking lender, we find that shocks take the form of a loan default contagion within local caste networks, plausibly due to preexisting economic linkages. Several robustness tests rule out delayed propagation of shocks being mischaracterized as a contagion. Thus, we highlight a dark side of social ties in credit markets.