Essays On ROSCAs

This dissertation studies the bidding rotating savings and credit associations (biddingROSCAs) popular in the coastal areas of southeast China. A ROSCA allocates a fund collectedfrom all members to one member in each period, and dissolves automatically when every membergets exactly one fund. Unlike random and fixed ROSCAS, bidding ROSCAs allocate funds withsequencial auctions about the amount of interest members are willing to pay. The government andmass media in China are often hostile to these grassrote financial institutions, because failings ofROSCAs can sometimes cripple local economies. In order to better understand these institutions,this dissertation adopts many methods in sociology and economics: it presents cases, summarizessurveys, builds mathematical models, and reports behavioral experiments. The emphasis is on theeconomic efficiency and risks.We first discuss the historical origin, geographical distribution, and categorizations ofROSCAs, especially the details about different designs of bidding ROSCAs. It is well-known thatROSCAs have a history of more than one thousand years, and are popular in developing countriesall over the world. The bidding ROSCAs are more advanced than the random and fixed ROSCAs,usually in areas with greater penetration of market economy. Our literature review comparesROSCAs with other microfinance institutions, and introduces first descriptive sociological andanthropological researches, and then economic models that try to explain the rationales for theirexistence. The explanations usually focuses on helping people solve self-control problems insaving, shortening the saving time for durable goods, providing insurance, etc.We go on to exhibit the cash flow of a typical bidding ROSCA, and suggest a way tocalculate the average interest rate. In this case, it is between bank deposite rates and popularmoneylender rates, an observation confirmed by later survey results, which suggests that theseinstitutions can balance the need of savers and borrowers. We also analyze two surveys about thefacts and opinions about the bidding ROSCAs in a Fujian county. Econometric modeling showsthat the wealth levels of households are positively correlated with ROSCA participations,suggesting that wealthy households are more welcomed by ROSCA organizers or that ROSCAshelp households accumulate wealth.Based on field experiences and other materials, we construct a game-theoretic model ofROSCA defaults. Levels of social capital and law enforcement can stabilize ROSCAs, but withsocial capital falling and law enforcement nonexistent, ROSCAs are risky. A sensible policy couldbe legalizing these institutions, and control their scales.We also use investment models to explain the functions of auction mechanisms. In atwo-person ROSCA model, we study the case with asymmetric share-holdings. We calculate theBayesian-Nash equilibrium of the auction game, and test the prediction with a behavioralexperiment. The calculated bidding strategies well predicts the bidding behaviors of our subjects.In a second experiment, we focus on a test of subjects’ ambiguity attitutes, and show that these attitutes could be consistently unstable, which posts challenges for the usual theorization ofambiguity that presumes ambiguity aversion.In a multi-person investment model, we show that a bidding ROSCA can efficiently allocatefunds given that participants are ex ante symmetric. The model is well-suited for the case in whichparticipants plan to save so as to start small businesses and the labor constraint make each of themonly need one loan. Auctions allow participants with higher investment returns to receive earlierloans, compensating others with appropriate interest payments, avoiding the inefficiencies ofrandom allocations.This dissertation summarizes my11-year researches on ROSCAs in Shanghai Jiao TongUniversity, and clarifies many thoughts about pros and cons of these institutions. It is clear that anoutright ban on them is not a sensible policy given their roles on improving economic efficiency.On the contrary, regulations following legalization can better serve the people. Moreover, thefuture microfinance innovations can make use of similar mechanisms for the sake of reducingrisks and increasing profits.