Roscas as financial agreements to cope with self-control problems

We consider a model in which people with limited self-control can sign binding financial agreements among themselves, thereby forming coalitions. We show that these financial agreements may help them to alleviate their self-control problems. We then demonstrate that there exists a stable structure of coalitions in which people form rotating savings and credit associations (roscas). We therefore provide a behavioral rationale for one of the most prevalent and puzzling financial institutions in developing countries. Finally, we derive and discuss some empirical predictions. © 2005 Elsevier B.V. All rights reserved.