The Economics of Rotating Savings and Credit Associations
This paper analyzes the economic role and performance of a type of financial insti- tution which is observed world-wide - rotating savings and credit associations (Roscas). Using a model in which individuals save for an indivisible durable consumption good, we study Roscas which distribute funds using random allocation and bidding. Each type of Rosca allows individuals without access to credit markets to improve their welfare but, under a reasonable assumption on preferences, random allocation is preferred when indivi- duals have identical tastes. This conclusion does not generally hold when individuals are heterogeneous. We also discuss the sustainability of Roscas given the possibility of default.
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|Date of creation:||Feb 1992|
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Web page: http://www.bu.edu/econ/ied/
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