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On the Optimal Size of a Joint Savings Association

Author

Listed:
  • Stark, Oded

    (University of Bonn)

  • Budzinski, Wiktor

    (University of Warsaw)

  • Jakubek, Marcin

    (Institute of Economics, Polish Academy of Sciences)

  • Kosiorowski, Grzegorz

    (Cracow University of Economics)

Abstract

We develop a formula for the optimal size of a joint savings association between individuals who share the same financial goal and who can save towards that goal at the same rate. Our motivating example and the core of our analysis is a Rotating Savings and Credit Association (ROSCA). We measure the efficiency of a ROSCA by the expected waiting time that it takes a participant to attain his goal when no participant reneges on his commitment to contribute to the common fund, and when each of the participants receives (once) the funds needed to meet his goal. Given this criterion, we define the optimal size of a ROSCA as the number of participants that results in the minimal expected waiting time. We show that an optimal size of a ROSCA exists, that it is limited, and that it is a multiple of the number of time periods that it takes an individual to save on his own. Somewhat surprisingly, we find that when treated as a function of the size of a ROSCA, the expected waiting time is not monotonic when the size builds up from an individual saving on his own to the optimal size. A similar result obtains when we study cases where a ROSCA is enlarged beyond the optimal size. Our findings help explain the limited size as well as other features of ROSCAs observed in developing countries all over the world.

Suggested Citation

  • Stark, Oded & Budzinski, Wiktor & Jakubek, Marcin & Kosiorowski, Grzegorz, 2022. "On the Optimal Size of a Joint Savings Association," IZA Discussion Papers 15383, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp15383
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    References listed on IDEAS

    as
    1. Besley, Timothy & Coate, Stephen & Loury, Glenn, 1993. "The Economics of Rotating Savings and Credit Associations," American Economic Review, American Economic Association, vol. 83(4), pages 792-810, September.
    2. Abbi Kedir & Gamal Ibrahim, 2011. "ROSCAs in Urban Ethiopia: Are the Characteristics of the Institutions More Important than those of Members?," Journal of Development Studies, Taylor & Francis Journals, vol. 47(7), pages 998-1016.
    3. Gugerty, Mary Kay, 2007. "You Can't Save Alone: Commitment in Rotating Savings and Credit Associations in Kenya," Economic Development and Cultural Change, University of Chicago Press, vol. 55(2), pages 251-282, January.
    4. Handa, Sudhanshu & Kirton, Claremont, 1999. "The economics of rotating savings and credit associations: evidence from the Jamaican 'Partner'," Journal of Development Economics, Elsevier, vol. 60(1), pages 173-194, October.
    5. Mary Kay Gugerty, 2007. "You Can't Save Alone: Commitment in Rotating Savings and Credit Associations in Kenya," Economic Development and Cultural Change, University of Chicago Press, vol. 55, pages 251-282.
    6. Alvin Etang & David Fielding & Stephen Knowles, 2011. "Trust and ROSCA membership in rural Cameroon," Journal of International Development, John Wiley & Sons, Ltd., vol. 23(4), pages 461-475, May.
    7. Joseph Kofi Acquah & Roshani Dahal, 2018. "ROSCAs as Lenders of Last Resort after Financial Crises: Lessons from Indonesia," Journal of International Development, John Wiley & Sons, Ltd., vol. 30(7), pages 1223-1239, October.
    8. Anderson, Siwan & Baland, Jean-Marie & Moene, Karl Ove, 2009. "Enforcement in informal saving groups," Journal of Development Economics, Elsevier, vol. 90(1), pages 14-23, September.
    9. Dohyun Ahn & Wanmo Kang & Kyoung-Kuk Kim & Hayong Shin, 2017. "Analysis and design of microfinance services: A case of ROSCA," The Engineering Economist, Taylor & Francis Journals, vol. 62(3), pages 197-230, July.
    10. Bouman, F. J. A., 1995. "Rotating and accumulating savings and credit associations: A development perspective," World Development, Elsevier, vol. 23(3), pages 371-384, March.
    11. Timothy Besley & Stephen Coate & Glenn Loury, 1994. "Rotating Savings and Credit Associations, Credit Markets and Efficiency," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(4), pages 701-719.
    12. Calomiris, Charles W. & Rajaraman, Indira, 1998. "The role of ROSCAs: lumpy durables or event insurance?," Journal of Development Economics, Elsevier, vol. 56(1), pages 207-216, June.
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    More about this item

    Keywords

    joint savings associations; Rotating Savings and Credit Association (ROSCA); minimal expected waiting time; optimal size of a ROSCA; limited size of a ROSCA;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D16 - Microeconomics - - Household Behavior - - - Collaborative Consumption
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • P13 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Cooperative Enterprises

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