IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Hyperbolic discounting and the sustainability of rotational savings arrangements

  • Basu, Karna

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 do not defect from these groups. I model a rosca as a commitment savings device for hyperbolic discounters. Roscas are attractive for two reasons: the possibility of getting the nondivisible good early (the standard reason), and the fixed saving requirement (valued only by time-inconsistent agents). I find explicit conditions under which an agent strictly prefers to remain in a rosca, even in the absence of formal contracting or social punishment. I show why, unlike with standard commitment products, a hyperbolic discounter will not postpone entry into a rosca. Finally, this paper makes predictions about the relative survival of random and fixed roscas. Random roscas are more resilient and beneficial than fixed roscas when information is limited and matching for new roscas is fast.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://mpra.ub.uni-muenchen.de/20440/1/MPRA_paper_20440.pdf
File Function: original version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20440.

as
in new window

Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:pra:mprapa:20440
Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. O'Donoghue, Ted & Rabin, Matthew, 1997. "Doing It Now or Later," Department of Economics, Working Paper Series qt7t44m5b0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. DeanS. Karlan, 2007. "Social connections and group banking," Economic Journal, Royal Economic Society, vol. 117(517), pages F52-F84, 02.
  3. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 635-672, May.
  4. Mary Kay Gugerty, 2007. "You Can’t Save Alone: Commitment in Rotating Savings and Credit Associations in Kenya," Economic Development and Cultural Change, University of Chicago Press, vol. 55, pages 251-282.
  5. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
  6. Siwan Anderson, 2000. "The Economics of Roscas and Intra-Household Resource Allocation," Econometric Society World Congress 2000 Contributed Papers 1323, Econometric Society.
  7. Ligon, Ethan & Thomas, Jonathan P & Worrall, Tim, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 209-44, January.
  8. Timothy Besley & Stephen Coate & Glenn Loury, 1992. "The Economics of Rotating Savings and Credit Associations," Boston University - Institute for Economic Development 24, Boston University, Institute for Economic Development.
  9. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
  10. Besley, Timothy & Levenson, Alec R, 1996. "The Role of Informal Finance in Household Capital Accumulation: Evidence from Taiwan," Economic Journal, Royal Economic Society, vol. 106(434), pages 39-59, January.
  11. 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.
  12. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  13. 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.
  14. 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.
  15. Anderson, K.S. & Baland, J-M., 2000. "The Economics of Roscas and Intra-Household Resource Allocation," Discussion Paper 2000-83, Tilburg University, Center for Economic Research.
  16. Olivier Dagnelie & Philippe LeMay-Boucher, 2008. "Rosca Participation in Benin: a Commitment Issue," Working Papers 339, Barcelona Graduate School of Economics.
  17. Kimuyu, Peter Kiko, 1999. "Rotating Saving and Credit Associations in Rural East Africa," World Development, Elsevier, vol. 27(7), pages 1299-1308, July.
  18. 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.
  19. Ashok Rai & Stefan Klonner, 2007. "Adverse Selection in Credit Markets: Evidence from a Policy Experiment," Center for Development Economics 2007-01, Department of Economics, Williams College.
  20. Bauer, Michal & Chytilová, Julie & Morduch, Jonathan, 2010. "Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India," IZA Discussion Papers 4901, Institute for the Study of Labor (IZA).
  21. Marianne Bertrand & Dean Karlin & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2005. "What's Psychology Worth? A Field Experiment in the Consumer Credit Market," NBER Working Papers 11892, National Bureau of Economic Research, Inc.
  22. Per Krusell & Anthony A. Smith, Jr., . "Consumption-Savings Decisions with Quasi-Geometric Discounting," GSIA Working Papers 2001-05, Carnegie Mellon University, Tepper School of Business.
  23. Marianne Bertrand & Sendhil Mullainathan & Dean Karlan & Eldar Shafir & Jonathan Zinman, 2009. "What's Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment," Working Papers 968, Economic Growth Center, Yale University.
  24. 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.
  25. Tomomi Tanaka & Colin F. Camerer & Quang Nguyen, 2010. "Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam," American Economic Review, American Economic Association, vol. 100(1), pages 557-71, March.
  26. Marianne Bertrand & Sendhil Mullainathan & Eldar Shafir, 2004. "A Behavioral-Economics View of Poverty," American Economic Review, American Economic Association, vol. 94(2), pages 419-423, May.
  27. Bouman, F. J. A., 1995. "Rotating and accumulating savings and credit associations: A development perspective," World Development, Elsevier, vol. 23(3), pages 371-384, March.
  28. Basu, Karna, 2014. "Commitment savings in informal banking markets," Journal of Development Economics, Elsevier, vol. 107(C), pages 97-111.
  29. Richard H. Thaler & Shlomo Benartzi, 2004. "Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages S164-S187, February.
  30. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
  31. 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.
  32. Bond, Philip & Rai, Ashok S., 2009. "Borrower runs," Journal of Development Economics, Elsevier, vol. 88(2), pages 185-191, March.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:20440. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.