Governance of micro-finance institution in Chinese social system

This paper focuses on governance of informal financing, specially, the group-based micro-finance institution. In Chinese social system, we developed a theoretical model which is about the governance of informal financing institutions of startup small businesses. In this, we want to analyze both the structure and its affecting factors of social governance system for such non market institution, in other words, to show how collective action can be affected by the interaction among Chinese social norms, social ties and group lending operations. There are several findings in our research: In micro-finance institution, social ties is prevalently used as governance instrument, the strategic choice is usually affected by the social ties and social interaction. These factors themselves increase the expectation of others collective action. Since group members adjust their action based on expectations of others, when your expectation of others' collective action occurs, you will be likely to undertake your responsibility of repaying. Thus, group lending shows strong dynamic incentive and evolutionary features. In addition, the Chinese social norms (such as MIANZI, RENQING, BAO) as moderators, also have effects on the relationship between social structure and performance of lending group. Because the participants will save face for their default partners, the social pressure and punishment was weakened by the social ties. Different from the individual adverse selection caused by imperfect information, we call the default which results from sharing social norms in lending group, the “Norm-based Adverse Selection (NAS)”.