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Hyperbolic Discounting and the Sustainability of Rotational Savings Arrangements

  • Karna Basu

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 not defect from roscas. This paper models roscas as commitment savings devices and derives conditions under which hyperbolic discounters will never defect, even in the absence of formal contracting, social punishment, and reputation. I show why, unlike with standard commitment devices, a hyperbolic discounter will not postpone entry into a rosca. Finally, this paper makes predictions about the relative survival of random and fixed roscas. (JEL D14, D91, O12)

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Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 3 (2011)
Issue (Month): 4 (November)
Pages: 143-71

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Handle: RePEc:aea:aejmic:v:3:y:2011:i:4:p:143-71
Note: DOI: 10.1257/mic.3.4.143
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