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Rotating Savings and Credit Associations as Insurance

  • Stefan Klonner

    (Universitaet Heidelberg)

Recent theoretical research on rotating savings and credit associations (Roscas) suggests that identical individuals prefer a random to a bidding Rosca when participants save for a lumpy durable or an investment good. Here,in contrast, under the assumption that participants are risk averse and that their incomes are stochastic and independent, it is shown that a random Rosca is not advantageous, while participation in a bidding Rosca improves ex ante expected utility if temporal risk aversion is less pronounced than static risk aversion. When information on individual incomes is private, fixed contributions to a bidding Rosca help to mitigate the problem of information asymmetries. When information on incomes is public, a lack of enforceability of variable contributions may explain the existence of Roscas instead of more efficient insurance arrangements.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1589.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1589
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  1. Levenson, Alec R. & Besley, Timothy, 1996. "The anatomy of an informal financial market: Rosca participation in Taiwan," Journal of Development Economics, Elsevier, vol. 51(1), pages 45-68, October.
  2. Besley, T. & Coate, S. & Loury, G., 1990. "The Economics Of Rotating Savings And Credit Associations," Working papers 556, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
  4. Duncan THOMAS, 1993. "The Distribution of Income and Expenditure within the Household," Annales d'Economie et de Statistique, ENSAE, issue 29, pages 109-135.
  5. Besley, Timothy & Coate, Stephen & Loury, Glenn, 1994. "Rotating Savings and Credit Associations, Credit Markets and Efficiency," Review of Economic Studies, Wiley Blackwell, vol. 61(4), pages 701-19, October.
  6. Handa, Sudhanshu & Kirton, Claremont, 1999. "The economics of rotating savings and credit associations: evidence from the Jamaican 'Partner'," Journal of Development Economics, Elsevier, vol. 60(1), pages 173-194, October.
  7. Calomiris, Charles W. & Rajaraman, Indira, 1998. "The role of ROSCAs: lumpy durables or event insurance?," Journal of Development Economics, Elsevier, vol. 56(1), pages 207-216, June.
  8. Kovsted, Jens & Lyk-Jensen, Peter, 1999. "Rotating savings and credit associations: the choice between random and bidding allocation of funds," Journal of Development Economics, Elsevier, vol. 60(1), pages 143-172, October.
  9. Ronn, Ehud I, 1988. "Nonadditive Preferences and the Marginal Propensity to Consume," American Economic Review, American Economic Association, vol. 78(1), pages 216-23, March.
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