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Why Use Roscas When You Can Use Banks? Theory And Evidence From Ethiopia

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  • Abbi 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 University of Nottingham, CREDIT in its series Discussion Papers with number 11/05.

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Handle: RePEc:not:notcre:11/05

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

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  1. 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.
  2. Olivier Dagnelie & Philippe LeMay-Boucher, 2008. "Rosca Participation in Benin: a Commitment Issue," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 735.08, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  3. 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.
  4. Thomas Crossley & Hamish Low & Sarah Smith, 2011. "Do consumers gamble to convexify?," IFS Working Papers, Institute for Fiscal Studies W11/07, Institute for Fiscal Studies.
  5. 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.
  6. Besley, T. & Coate, S. & Loury, G., 1992. "The economics of Rotating Savings and Credit Associations," Papers, Princeton, Woodrow Wilson School - Development Studies 157, Princeton, Woodrow Wilson School - Development Studies.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. 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.
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Cited by:
  1. Alem, Yonas & Hassen, Sied & Kohlin, Gunnar, 2013. "The Dynamics of Electric Cookstove Adoption: Panel Data Evidence from Ethiopia," Discussion Papers, Resources For the Future dp-13-03-efd, Resources For the Future.

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