This paper by Dean S. Karlan from Yale and Princeton Universities explores the use of experimental economics to measure social capital and predict financial decisions. The study focuses on two experiments: the Trust game and the Public Goods game, conducted with participants from a Peruvian microfinance program, FINCA. The Trust game measures trust and trustworthiness, while the Public Goods game assesses contributions to a common pool. The paper examines whether behavior in these games predicts loan repayment and savings behavior. Key findings include: - Individuals identified as "trustworthy" in the Trust game are less likely to default on their loans. - The Trust game does not effectively measure trust, as players' actions may be driven by risk-taking rather than trust. - The Public Goods game has no predictive power for financial decisions. - General Social Survey (GSS) questions on trust, fairness, and helping predict higher repayment and savings. - Trustworthiness, as measured by the Trust game, is a strong predictor of loan repayment and savings behavior. The study concludes that while the Trust game can predict loan repayment, it is not a reliable measure of trust. Trustworthiness, however, is a crucial factor in the success of group lending programs and can help solve financial market failures for the poor.This paper by Dean S. Karlan from Yale and Princeton Universities explores the use of experimental economics to measure social capital and predict financial decisions. The study focuses on two experiments: the Trust game and the Public Goods game, conducted with participants from a Peruvian microfinance program, FINCA. The Trust game measures trust and trustworthiness, while the Public Goods game assesses contributions to a common pool. The paper examines whether behavior in these games predicts loan repayment and savings behavior. Key findings include: - Individuals identified as "trustworthy" in the Trust game are less likely to default on their loans. - The Trust game does not effectively measure trust, as players' actions may be driven by risk-taking rather than trust. - The Public Goods game has no predictive power for financial decisions. - General Social Survey (GSS) questions on trust, fairness, and helping predict higher repayment and savings. - Trustworthiness, as measured by the Trust game, is a strong predictor of loan repayment and savings behavior. The study concludes that while the Trust game can predict loan repayment, it is not a reliable measure of trust. Trustworthiness, however, is a crucial factor in the success of group lending programs and can help solve financial market failures for the poor.