Rotating Savings and Credit Associations When Participants are Risk Averse

Stefan Klonner

International Economic Review, 2003, vol. 44, issue 3, 979-1005

Abstract: We model rotating savings and credit associations (Roscas) among risk-averse participants who experience privately observed income shocks. A random Rosca is not advantageous, whereas a bidding Rosca is if temporal risk aversion is less pronounced than static risk aversion. The payoff scheme of a bidding Rosca facilitates risk sharing in the presence of information asymmetries. The risk-sharing performance of a simple arrangement where a group of homogenous individuals runs several bidding Roscas simultaneously is as good as that of a linear risk-sharing contract, and is more enforceable because it carries a fixed rather than a variable contribution. Copyright 2003 By The Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Date: 2003
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