ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Do Social Networks Facilitate the Spread of Ponzi Schemes?

Evidence from a Primary Survey

Do Social Networks Facilitate the Spread of Ponzi Schemes?

Ponzi schemes, which have become widespread in some parts of the country, including eastern India and West Bengal, have inflicted heavy losses on the investors and have claimed several human lives. A primary survey shows how social networks created by self-help groups, though they provide higher incomes and social insurance to the members, also facilitate the spread of misinformation regarding Ponzi schemes and hurt naïve investors. The gullibility of potential investors can be reduced if the same networks are used to foster financial literacy.

Social and economic networks, which complement impersonal markets, have been observed to play very important roles in shaping up the fabric of a society or economy. Examples of networks creating positive externalities are numerous. Studies have shown that social and economic contacts are important in obtaining information about job openings as well as securing employment. They are also important in developing supply chains and market outlets. They matter in decisions regarding technology adoption, migration, credit disbursement, co-authorship and dissemination of research. On the other hand, there are examples of networks with negative externalities as well. Spreading of computer viruses, expansion of organised drug or human trafficking are indeed facilitated by networks, which have negative impacts on the society (see Jackson [2008] for a detailed analysis of social and economic networks).

While networks are important in both advanced as well as relatively backward parts of the world, they become especially crucial for societies where formal markets are not well-developed. This means that for less developed countries networks are extremely important. One such important network can be observed among microfinance groups. These groups are formed for the purpose of getting small loans from rural banks or microfinance institutions. The repayment of each group member is often joint liability of the group and sometimes it is an individual liability. Be that as it may, the formation of the group itself has important social and economic consequences, in addition to securing the loan. It gives rise to social networks which facilitate other types of economic and social exchanges between the group members.

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Updated On : 13th Sep, 2019

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