RIEB, Kobe University

Reciprocity and Exclusion in Informal Financial Institutions: An Experimental Study of Rotating Savings and Credit Associations

Rotating savings and credit associations (Roscas) are worldwide informal financial institutions, in which all participants contribute to a fund and one of them receives it in rotation. A crucial problem is that participants have incentives to default on contributing after receiving the fund. We conducted an experiment and found that Roscas were sustained using a rule of excluding defaulters from the group by voting. We observed that group members behave reciprocally and revengefully: a member contributed (or did not contribute) to the fund of other members who had (or had not) contributed to theirs. This voluntary behavior sustained Roscas.