Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 17/2003: Sustainability and organizational design in informal groups, with some evidence from Kenyan Roscas

Siwan Anderson (), Jean-Marie Baland () and Karl O. Moene ()
Additional contact information
Siwan Anderson: Department of Economics, University of British Columbia, Postal: UBC Department Of Economics, 977 - 1873 East Mall, Vancouver, BC, Canada
Jean-Marie Baland: CRED, University of Namur, Postal: CRED, Department of Economics,, FUNDP 8, , Rempart De La Vierge, , B5000 Namur, , Belgium
Karl O. Moene: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway

Abstract: Informal groups cannot rely on external enforcement to insure that members abide by their obligations. It is generally assumed that these problems are solved by "social sanctions" and reputational effects. The present paper focuses on roscas, one of the most commonly found informal financial institutions in the developing world. We first show that, in the absence of an external (social) sanctioning mechanism, roscas are never sustainable, even if the defecting member is excluded from all future roscas. We then argue that the organizational structure of the rosca itself can be designed so as to reduce the severity of enforcement issues. The implications of our analysis are tested against first-hand evidence from rosca groups in a Kenyan slum.

Keywords: Roscas; informal financial institutions; developing world

JEL-codes: G20

49 pages, February 5, 2010

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