Rotating Savings and Credit Associations as Insurance
AbstractRecent theoretical research on rotating savings and credit associations (Roscas) suggests that identical individuals prefer a random to a bidding Rosca when participants save for a lumpy durable or an investment good. Here,in contrast, under the assumption that participants are risk averse and that their incomes are stochastic and independent, it is shown that a random Rosca is not advantageous, while participation in a bidding Rosca improves ex ante expected utility if temporal risk aversion is less pronounced than static risk aversion. When information on individual incomes is private, fixed contributions to a bidding Rosca help to mitigate the problem of information asymmetries. When information on incomes is public, a lack of enforceability of variable contributions may explain the existence of Roscas instead of more efficient insurance arrangements.
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