NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Rosca Meets Formal Credit Market

Hanming Fang, Rongzhu Ke, Li-An Zhou

NBER Working Paper No. 21683
Issued in October 2015
NBER Program(s):The Development Economics Program, The Public Economics Program

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.

download in pdf format
   (575 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w21683

Users who downloaded this paper also downloaded* these:
Campello and Larrain w21690 Enlarging the Contracting Space: Collateral Menus, Access to Credit, and Economic Activity
Carlino and Inman w21680 Fiscal Stimulus in Economic Unions: What Role for States?
House and Tesar w21688 Greek Budget Realities: No Easy Options
Fang, Gu, Xiong, and Zhou w21112 Demystifying the Chinese Housing Boom
De Weerdt, Genicot, and Mesnard w21685 Asymmetry of Information within Family Networks
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us