Categorical Coherence or Sequential Consistency: Breach of contract in SME financing

Abstract

Contracts are foundational components of economic and social life as they specify rights and responsibilities between or among parties in various exchanges. Although contracts have received substantial and sustained attention in economics, they have largely elided sociological investigation. This may be due to sociologists’ emphasis on substitutable mechanisms including social exchange or social networks and related structural features. In this research we study breach of contract in the context of SME financing using novel, hand-collected longitdunial data of over 450,000 SME loans (the entire population) made between 2002 - 2008 in one country. We propose theory that specifies how both the coherence and sequential consistency in contract enforcement style of a loan enforcement agent influences a loan recipient’s adherence to contractual provisions concerning payment. By proposing this theory and related empirical test we broaden the literature on categorical coherence by observing its applicability in direct exchanges rather than in mediated markets (Zuckerman 2004). In the process, we also provide a theoretical and empirical contrast of the effects of categorical coherence vis-à-vis sequential categorical consistency—two concepts that have yet to be distinguished, and which we show should be. Finally, by extending this line of sociological enquiry into a bedrock mechanism and artifact of economic exchange, contracts, we reveal the social dimension of their enforcement.