The role of ROSCAs: lumpy durables or event insurance?

Abstract

The stylised representation of ROSCAs in recent theoretical work as a device driven by impatience for lumpy consumer durables misses the important insurance role of this pervasive informal financial institution in the developing world. That insurance role explains why ROSCAs with concurrent bidding are the dominant means of determining the sequence and pricing of allocations. In ROSCAs so structured, the recipient and the implied interest rate for each period's allotment are determined by competitive bids at the time of distribution. We use an example of an actual bidding ROSCA to demonstrate the extent of unpredictable needs for funds, as reflected in the volatility of interest rates implicit in winning bids.