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Why use ROSCAs when you can use banks? Theory, and evidence from Ethiopia

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  • Abbi M Kedir

    ()

  • Richard Disney

    ()

  • Indraneel Dasgupta

Abstract

Much of the existing literature on the use of informal credit arrangements such as ROSCAs (Rotating and Credit Saving Associations) theorises the use of such institutions as arising from market failures in the development of formal saving and credit mechanisms. As economic development proceeds, formal institutions might therefore be expected to displace ROSCAs. We show, using household data for Ethiopia, that in fact use of formal institutions and ROSCAs can co-exist, even in the same household. We examine usage of both formal and informal institutions across the household income gradient, and provide a theoretical model consistent with these empirical facts.

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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 11/32.

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Date of creation: Jun 2011
Date of revision: Jun 2011
Handle: RePEc:lec:leecon:11/32

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Keywords: Household saving; Credit institutions; ROSCAs; Ethiopia;

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  1. Cleveland, William S. & Devlin, Susan J. & Grosse, Eric, 1988. "Regression by local fitting : Methods, properties, and computational algorithms," Journal of Econometrics, Elsevier, Elsevier, vol. 37(1), pages 87-114, January.
  2. Calomiris, Charles W. & Rajaraman, Indira, 1998. "The role of ROSCAs: lumpy durables or event insurance?," Journal of Development Economics, Elsevier, Elsevier, vol. 56(1), pages 207-216, June.
  3. Olivier Dagnelie & Philippe LeMay-Boucher, 2008. "Rosca Participation in Benin: a Commitment Issue," Working Papers 339, Barcelona Graduate School of Economics.
  4. Stefan Klonner, 2003. "Rotating Savings and Credit Associations When Participants are Risk Averse," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 979-1005, 08.
  5. Thomas F. Crossley & Hamish Low & Sarah Smith, 2013. "Do Consumers Gamble to Convexify?," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 1314, Koc University-TUSIAD Economic Research Forum.
  6. Anderson, K.S. & Baland, J-M., 2000. "The Economics of Roscas and Intra-Household Resource Allocation," Discussion Paper, Tilburg University, Center for Economic Research 2000-83, Tilburg University, Center for Economic Research.
  7. Ambec, Stefan & Treich, Nicolas, 2007. "Roscas as financial agreements to cope with self-control problems," Journal of Development Economics, Elsevier, Elsevier, vol. 82(1), pages 120-137, January.
  8. Besley, T. & Coate, S. & Loury, G., 1990. "The Economics Of Rotating Savings And Credit Associations," Papers, Princeton, Woodrow Wilson School - Development Studies 149, Princeton, Woodrow Wilson School - Development Studies.
  9. Besley, Timothy & Coate, Stephen & Loury, Glenn, 1994. "Rotating Savings and Credit Associations, Credit Markets and Efficiency," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(4), pages 701-19, October.
  10. Carpenter, Seth B & Jensen, Robert T, 2002. "Household Participation in Formal and Informal Savings Mechanisms: Evidence from Pakistan," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 6(3), pages 314-28, October.
  11. Ng Yew Kwang, 1965. "Why do People Buy Lottery Tickets? Choices Involving Risk and the Indivisibility of Expenditure," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 73, pages 530.
  12. Handa, Sudhanshu & Kirton, Claremont, 1999. "The economics of rotating savings and credit associations: evidence from the Jamaican 'Partner'," Journal of Development Economics, Elsevier, Elsevier, vol. 60(1), pages 173-194, October.
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Cited by:
  1. Alem, Yonas & Hassen, Sied & Köhlin, Gunnar, 2013. "The Dynamics of Electric Cookstove Adoption: Panel data evidence from Ethiopia," Working Papers in Economics, University of Gothenburg, Department of Economics 557, University of Gothenburg, Department of Economics.

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