DP443 | The Economics of Rotating Savings and Credit Associations

Publication Date

01/08/1990

JEL Code(s)

Keyword(s)

Programme Area(s)

Abstract

This paper examines the role and performance of an institution for allocating savings that is observed world-wide -- rotating savings and credit associations. We develop a general equilibrium model of an economy with an indivisible durable consumption good and compare and contrast these informal institutions with credit markets and autarkic saving in terms of the properties of their allocations and the expected utility which they obtain. We also characterize Pareto efficient and expected utility-maximizing allocations for our economy, which serve as useful benchmarks for the analysis. Among our results is the striking finding that rotating savings and credit associations that allocate funds randomly may sometimes yield a higher level of expected utility to prospective participants than would a perfect credit market.