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The economics of rotating savings and credit associations

By Timothy Besley, Stephen Coate and Glenn Loury

Abstract

This paper analyzes the economic role and performance of a type of financial institution which is observed worldwide: 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 individuals have identical tastes. This conclusion need not hold when individuals are heterogeneous. We also discuss the sustainability of Roscas given the possibility of default

Topics: HB Economic Theory, HG Finance
Publisher: American Economic Association
Year: 1993
OAI identifier: oai:eprints.lse.ac.uk:1613
Provided by: LSE Research Online
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