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Hyperbolic discounting and the sustainability of rotational savings arrangements

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  • Basu, Karna

Abstract

People across the developing world join rotational savings and credit associations (roscas) to fund repeated purchases of nondivisible goods. When the scope for punishment is weak, there is a natural question about why agents do not defect from these groups. I model a rosca as a commitment savings device for hyperbolic discounters. Roscas are attractive for two reasons: the possibility of getting the nondivisible good early (the standard reason), and the fixed saving requirement (valued only by time-inconsistent agents). I find explicit conditions under which an agent strictly prefers to remain in a rosca, even in the absence of formal contracting or social punishment. I show why, unlike with standard commitment products, a hyperbolic discounter will not postpone entry into a rosca. Finally, this paper makes predictions about the relative survival of random and fixed roscas. Random roscas are more resilient and beneficial than fixed roscas when information is limited and matching for new roscas is fast.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20440.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:20440

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Keywords: hyperbolic discounting; roscas; quasi-hyperbolic discounting; saving;

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Citations

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Cited by:
  1. Esther Duflo, 2012. "Women Empowerment and Economic Development," Journal of Economic Literature, American Economic Association, vol. 50(4), pages 1051-79, December.
  2. Banerjee, Abhijit & Duflo, Esther, 2010. "Giving Credit Where it is Due," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7754, C.E.P.R. Discussion Papers.
  3. Angelucci, Manuela & Karlan, Dean S. & Zinman, Jonathan, 2013. "Win Some Lose Some? Evidence from a Randomized Microcredit Program Placement Experiment by Compartamos Banco," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9506, C.E.P.R. Discussion Papers.
  4. Michal Bauer & Julie Chytilova & Jonathan Morduch, 2012. "Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India," American Economic Review, American Economic Association, American Economic Association, vol. 102(2), pages 1118-39, April.
  5. Manuela Angelucci, Dean Karlan, Jonathan Zinman, 2013. "Win Some Lose Some? Evidence from a Randomized Microcredit Program Placement Experiment by Compartamos Banco-Working Paper 330," Working Papers, Center for Global Development 330, Center for Global Development.
  6. Pascaline Dupas & Jonathan Robinson, 2011. "Why Don't the Poor Save More? Evidence from Health Savings Experiments," NBER Working Papers 17255, National Bureau of Economic Research, Inc.
  7. Bengtsson, Niklas & Pettersson, Jan, 2012. "The Outreach and Sustainability of Microfinance: Is There a Tradeoff?," Working Paper Series, Center for Labor Studies, Uppsala University, Department of Economics 2012:18, Uppsala University, Department of Economics.
  8. Basu, Karna, 2014. "Commitment savings in informal banking markets," Journal of Development Economics, Elsevier, Elsevier, vol. 107(C), pages 97-111.
  9. Basu, Karna, 2009. "A behavioral model of simultaneous borrowing and saving," MPRA Paper 20442, University Library of Munich, Germany.
  10. Carlsson, Fredrik & Yang, Xiaojun, 2013. "Intertemporal Choice Shifts in Households: Do they occur and are they good?," Working Papers in Economics, University of Gothenburg, Department of Economics 569, University of Gothenburg, Department of Economics.

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