Club members help each other out

In “Rent-Seeking in Elite Networks” (pdf), Rainer Haselmann, David Schoenherr and Vikrant Vig study what they call the “dark side of social capital”. They show that members of a German service club tend to give each other more favorable lending conditions.

They collect data on corporate CEOs in 211 service clubs in Southern Germany between 1993 and 2011. The authors cannot provide the name of the club, but I presume it’s either the Lions or the Rotary club. They identify 1091 such CEOs and 352 club bankers.

In Germany, mayors have influence on credit decisions by local savings banks. The authors show that after a club member is elected mayor, banks treat club-affiliated firms favorably.

This misallocation of credit within the club mainly takes the form of continuing to provide credit to badly performing firms rather than outright better conditions, such as lower interest rates. It’s a bit surprising that these banks don’t have checks in place to stop such behavior, as there seems no benefit of this relationship to the bank. Well maybe they’ll be more careful after hearing about this paper.