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Why use ROSCAs when you can use banks? Theory, and evidence from Ethiopia

  • Abbi M Kedir

    ()

  • Richard Disney

    ()

  • Indraneel Dasgupta

Much of the existing literature on the use of informal credit arrangements such as ROSCAs (Rotating and Credit Saving Associations) theorises the use of such institutions as arising from market failures in the development of formal saving and credit mechanisms. As economic development proceeds, formal institutions might therefore be expected to displace ROSCAs. We show, using household data for Ethiopia, that in fact use of formal institutions and ROSCAs can co-exist, even in the same household. We examine usage of both formal and informal institutions across the household income gradient, and provide a theoretical model consistent with these empirical facts.

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File URL: http://www.le.ac.uk/economics/research/repec/lec/leecon/dp11-32.pdf
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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 11/32.

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Date of creation: Jun 2011
Date of revision: Jun 2011
Handle: RePEc:lec:leecon:11/32
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  1. Besley, T. & Coate, S. & Loury, G., 1992. "The economics of Rotating Savings and Credit Associations," Papers 157, Princeton, Woodrow Wilson School - Development Studies.
  2. Cleveland, William S. & Devlin, Susan J. & Grosse, Eric, 1988. "Regression by local fitting : Methods, properties, and computational algorithms," Journal of Econometrics, Elsevier, vol. 37(1), pages 87-114, January.
  3. 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.
  4. Thomas F. Crossley & Hamish Low & Sarah Smith, 2013. "Do Consumers Gamble to Convexify?," Koç University-TUSIAD Economic Research Forum Working Papers 1314, Koc University-TUSIAD Economic Research Forum.
  5. Siwan Anderson & Jean-Marie Baland, 2002. "The Economics Of Roscas And Intrahousehold Resource Allocation," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 963-995, August.
  6. 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.
  7. Stefan Klonner, 2003. "Rotating Savings and Credit Associations When Participants are Risk Averse," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 979-1005, 08.
  8. Olivier Dagnelie & Philippe Lemay‐Boucher, 2012. "Rosca Participation in Benin: A Commitment Issue," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(2), pages 235-252, 04.
  9. Ng Yew Kwang, 1965. "Why do People Buy Lottery Tickets? Choices Involving Risk and the Indivisibility of Expenditure," Journal of Political Economy, University of Chicago Press, vol. 73, pages 530.
  10. Carpenter, Seth B & Jensen, Robert T, 2002. "Household Participation in Formal and Informal Savings Mechanisms: Evidence from Pakistan," Review of Development Economics, Wiley Blackwell, vol. 6(3), pages 314-28, October.
  11. 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.
  12. Ambec, Stefan & Treich, Nicolas, 2007. "Roscas as financial agreements to cope with self-control problems," Journal of Development Economics, Elsevier, vol. 82(1), pages 120-137, January.
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