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The Economics of Rotating Savings and Credit Associations

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  • Besley, Timothy
  • Coate, Stephen
  • Loury, Glenn

Abstract

This paper analyzes the economic role and performance of a type of financial institution that is observed worldwide: rotating savings and credit associations. Using a model in which individuals save for an indivisible durable consumption good, the authors study rotating savings and credit associations that distribute funds using random allocation and bidding. Each type of rotating savings and credit association allows individuals without access to credit markets to improve their welfare but, under a reasonable assumption on preferences, random allocation is preferred when individuals have identical tastes. This conclusion need not hold when individuals are heterogeneous. The authors also discuss the sustainability of rotating savings and credit associations given the possibility of default. Copyright 1993 by American Economic Association.

Suggested Citation

  • Besley, Timothy & Coate, Stephen & Loury, Glenn, 1993. "The Economics of Rotating Savings and Credit Associations," American Economic Review, American Economic Association, vol. 83(4), pages 792-810, September.
  • Handle: RePEc:aea:aecrev:v:83:y:1993:i:4:p:792-810
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