Rosca Meets Formal Credit Market

Hanming Fang, Rongzhu Ke and Li-An Zhou

No 21683, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Rotating Savings and Credit Association (Rosca) is an important informal financial institution in many parts of the world used by participants to share income risks. What is the role of Rosca when formal credit market is introduced? We develop a model in which risk-averse participants attempt to hedge against their private income shocks with access to both Rosca and the formal credit and investigate their interactions. Using the gap of the borrowing and saving interest rates as a measure of the imperfectness of the credit market, we compare three cases: (i) Rosca without credit market; (ii) Rosca with a perfect credit market; (iii) Rosca with an imperfect credit market. We show that a perfect credit market completely crowds out the role of Rosca. However, when credit market is present but imperfect, we show that Rosca and the formal credit market can complement each other in improving social welfare. Interestingly, we find that the social welfare in an environment with both Rosca and formal credit market does not necessarily increase monotonically as the imperfectness of the credit market converges to zero.

JEL-codes: D44 G21 O16 O17 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-iue and nep-mfd
Note: DEV PE
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Citations: View citations in EconPapers (2)

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