Rosca Meets Formal Credit Market

Hanming Fang, Rongzhu Ke and Li-An Zhou

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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.

Keywords: Roscas; Informal Credit Institutions; Insurance; Private Information (search for similar items in EconPapers)
JEL-codes: D44 G21 O16 O17 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2015-10-23, Revised 2015-10-23
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Rosca Meets Formal Credit Market (2015)
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