NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Rongzhu Ke

Department of Economics
Chinese University of Hong Kong
Shatin N.T., Hong Kong
CHINA

E-Mail: rongzhuke@hkbu.edu.hk
Institutional Affiliation: Hong Kong Baptist University

NBER Working Papers and Publications

October 2015Rosca Meets Formal Credit Market
with Hanming Fang, Li-An Zhou: w21683
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 ...
 
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