Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test

Abstract

Economists now appreciate that resource allocation in less economically developed economies is profoundly influenced by non-firm economic institutions. However our theories of non-firm institutions often suggest different answers to many questions including those of policy. This paper illustrates a method for discriminating between alternative theories using data from German credit cooperatives from the nineteenth and early twentieth century Germany. We build a model of credit cooperatives designed to provide monitoring incentives and test this using nineteenth century data. (authors)