Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/268093 
Year of Publication: 
2022
Series/Report no.: 
ZEF Discussion Papers on Development Policy No. 317
Publisher: 
University of Bonn, Center for Development Research (ZEF), Bonn
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.
Subjects: 
Joint savings associations
A Rotating Savings and Credit Association (ROSCA)
Minimal expected waiting time
Optimal size of a ROSCA
Limited size of a ROSCA
JEL: 
D01
D02
D16
D23
D71
D86
G23
O12
O17
P13
Document Type: 
Working Paper

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