Cooperative Dilemmas in Microfinance: Ability versus Willingness to Enforce Group Loans in Sierra Leone

Under what structural conditions does the ability to enforce economic cooperation outweigh the willingness to enforce? We derive a framework from sociological theory in which the structural forces that mitigate the first-order cooperative dilemma may simultaneously exacerbate the second-order dilemma. We then examine how two dimensions of structural embeddedness, (1) structural cohesion and (2) disconnected subgroups, shape the behavior of microfinance clients in Sierra Leone. Group lending provides an ideal empirical cooperative dilemma: if one member does not repay, the others are held financially responsible. We complement statistical modelling with ethnographic analysis in a nested research design, the highest level including 5,582 repayments made by 1,884 borrowers. The results clarify how different group structures determine which alternative enforcement mechanisms are likely to dominate collective outcomes. We find that structural cohesion consistently increases economic cooperation to a point, beyond which unwillingness to punish outweighs the benefits of increased ability, resulting in worse group repayment. In contrast, groups that consist of disconnected subgroups are more willing to punish defectors in the out-subgroup. However, they are less able to effectively sanction and overall performance suffers.