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Hyperbolic Discounting and the Sustainability of Rotational Savings Arrangements

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  • Karna Basu

Abstract

People across the developing world join rotational savings and credit associations (roscas) to fund repeated purchases of nondivisible goods. When the scope for punishment is weak, there is a natural question about why agents not defect from roscas. This paper models roscas as commitment savings devices and derives conditions under which hyperbolic discounters will never defect, even in the absence of formal contracting, social punishment, and reputation. I show why, unlike with standard commitment devices, a hyperbolic discounter will not postpone entry into a rosca. Finally, this paper makes predictions about the relative survival of random and fixed roscas. (JEL D14, D91, O12)

Suggested Citation

  • Karna Basu, 2011. "Hyperbolic Discounting and the Sustainability of Rotational Savings Arrangements," American Economic Journal: Microeconomics, American Economic Association, vol. 3(4), pages 143-171, November.
    • Handle: RePEc:aea:aejmic:v:3:y:2011:i:4:p:143-71
    Note: DOI: 10.1257/mic.3.4.143
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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