Rotating savings and credit associations (Roscas) are an important informal financial institution around the world. They are most common in developing countries, but immigrant groups in the United States also used them. All forms of Roscas share the following common feature: a group of individuals, mostly connected in some close social networks, commit to contribute a fixed sum of money into a "pot" in each of the equally spaced periods of the life of the Rosca; in each period, the "pot" is then allocated to one member of the Rosca through some mechanisms. The mechanism through which the"pot"is allocated is one of the key dimensions of the many variations of how Roscas operates around the world, as documented by the classic anthropological studies of Roscas by Geertz (1962) and Ardener (1964).
Two main varieties are random Rosca and bidding Rosca. In a random Rosca, the pot in each period is allocated to one of the members determined by the draw of lots, with past winners excluded from later draws until each member of the Rosca has received the pot once. In a bidding Rosca, auctions are used to determine the priority of assessing the pot. In each period, the individual who bid more than the competitors in the form of a pledge of higher contributions to the Rosca is chosen to access the pot. As in the Random Rosca, the past winners are excluded from latter auctions.
A seminal paper by Besley, Coate and Loury (1993) provide rigorous comparisons of random and bidding Roscas in an environment where individuals save for an indivisible durable good purchase where formal credit markets are not available. Besley, Coate and Loury (1994) further compared the efficiency properties of allocations achieved by random and bidding Roscas and those achieved with a credit market and with efficient allocations more generally. They found that neither form of Rosca is efficient.
Our paper is motivated by two observations about the existing theoretical literature on Rosca and some empirical facts about bidding Roscas in Southeastern China (see Section 2 for more details).
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The Insurance Role of Rosca in the Presence of Credit Markets: Theory and Evidence
