ROTATING SAVINGS AND CREDIT ASSOCIATIONS, CREDIT MARKETS AND EFFICIENCY

This paper examines the allocative performance of rotating savings and credit associations (roscas), a financial institution which is observ ed world-wide. We develop a model in which individuals save for an ind ivisible good and study roscas which distribute funds using random all ocation and bidding. The allocations achieved by the two types of rosc a are compared with that achieved by a credit market and with efficien t allocations more generally. We find that neither type of rosca is ef ficient and that individuals are better off with a credit market than a bidding rosca. Nonetheless, a random rosca may sometimes yield a hig her level of ex ante expected utility to prospective participants than would a credit market.