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This paper examines the allocative performance of rotating savings and credit associations (ROSCAS), a financial institution that is observed worldwide. The authors develop a model in which individuals save for an indivisible good and study ROSCAS that distribute funds using random allocation and bidding. The allocations achieved by the two types of ROSCA are compared with that achieved by a credit market and with efficient allocations. Neither type of ROSCA is efficient and individuals are better off with a credit market than a bidding ROSCA, a random ROSCA may yield higher ex ante expected utility than a credit market. Copyright 1994 by The Review of Economic Studies Limited.
Besley et al. (Sat,) studied this question.