Rotating Savings Clubs and the Control of Dynamic Inconsistency

The purpose of this study is to examine the economic function that rotating savings and credit associations (ROSCAs) serve in the lives of the poor. The proposition is that the primary function of ROSCAs is to assist their members to save money in the face of wavering self-discipline. Evidence to this effect is derived from data collected in two rural areas of South Africa. The issue of imperfect self-discipline is related to the concept of dynamic inconsistency, by which is meant the tendency to deviate from one's plans or intentions. In the context of ROSCAs, dynamic inconsistency means failing to save as much money as one needs or intends to save. It is proposed that people are susceptible to this type of dynamic inconsistency due to at least three factors: cognitive difficulty in identifying the optimal savings plan in the first place; vulnerability to impulse spending; and a high degree of impatience. ROSCAs serve as a potent antidote to dynamic inconsistency, because they establish a robust commitment to regimented behavior. People join ROSCAs precisely because ROSCAs promise to enforce a consistency in behavior that one may fail to achieve on one's own.

Autorentext

Michael Aliber is a researcher at the Institute for Poverty, Land and Agrarian Studies, University of the Western Cape, South Africa. He undertakes research in the areas of land reform, rural development, poverty reduction, and micro-finance. He holds a PhD in Agricultural and Applied Economics from the University of Wisconsin (2000).