On Designs of Rotating Savings and Credit Associations
28 Pages Posted: 17 Jan 2013
Date Written: January 16, 2013
Auction mechanisms are widely recognized to improve allocation efficiency in various economic environments, but the literature on rotating savings and credit associations (ROSCAs) has yet to identify circumstances in which bidding ROSCAs achieve first-best allocations of funds. This paper discusses how well different ROSCA designs serve to promote welfare for small business entrepreneurs by accelerating investments. While random and discount bidding ROSCAs improve upon autarky, premium bidding ROSCAs and some particular fixed ROSCAs can further establish efficiency despite incomplete information about investment returns. Actually, premium bidding ROSCAs are indiscriminately superior to random ROSCAs, i.e., an agent never prefers a random ROSCA, no matter what strategies other members will adopt. This belief-robust ordering of mechanisms is illuminating in broader contexts such as partnership dissolving. As economic development differentiate economic opportunities, we expect more ROSCAs to embrace auction designs, bridging borrowers and lenders with endogenous interest rates.
Keywords: random ROSCAs, fixed ROSCAs, premium bidding ROSCAs, discount bidding ROSCAs, indiscriminate superiority, belief-robust
JEL Classification: D44, G21, O16, O17
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