Time preferences, sophistication, and trustworthiness in ROSCA participation: Theory and field experimental evidence

We explore how individual behavioral characteristics—namely, time preferences, trustworthiness, and self‐awareness of present bias—shape participation in rotating savings and credit associations (ROSCAs), a prominent type of informal financial institution. We develop a model that integrates quasi‐hyperbolic discounting, trustworthiness, and agent sophistication to derive a sorting equilibrium between fixed and bidding ROSCAs. Our model reveals that more patient, sophisticated, and trustworthy agents derive greater value from the commitment features of fixed ROSCAs. In contrast, more present‐biased and naïve individuals favor the liquidity premium offered by bidding ROSCAs, even though this design exposes them to higher default risk. We next test the model by conducting experiments with both ROSCA participants and non‐participants. Our findings provide strong evidence for the model's core behavioral mechanisms. Fixed ROSCA participants exhibit significantly lower discount rates than bidding ROSCA participants; in multivariate participation regressions, the discount rate is negatively associated with participation and is statistically significant at the 10% level. Fixed ROSCA members are also significantly more trustworthy, with trustworthiness effects differing markedly across institutional contexts. Present bias patterns align with theoretical predictions, with bidding ROSCA participants in the South showing significantly greater present bias than non-participants. These results shed new insights into the behavioral foundations of informal financial participation and provide policy‐relevant implications for improving financial stability and inclusion in developing economies.