Sustainability and Organizational Design in Informal Groups, with some Evidence from Kenyan Roscas
This paper explores whether institutional features of informal groups prevent members from defaulting on their responsibilities.
Informal groups, such as rotating savings and credit associations (ROSCAs) do not rely on external enforcement. It is generally assumed that enforcement problems are solved by social sanctions and reputational effects. The paper examines ROSCA groups in a Kenyan slum. It demonstrates that, in the absence of an external sanctioning mechanism, ROSCAs are never sustainable, even if the defecting member is banned from all future ROSCAs.
Study findings indicate that the organizational structure of the ROSCA can be designed to reduce the severity of enforcement issues. Findings include:
- Reliable individuals participate in ROSCAs that are more prone to enforcement problems;
- Reliable individuals tend to belong to ROSCAs where the order of the ranks is randomly drawn at each cycle and where members can request to change their ranks;
- These ROSCAs tend to have a less formal structure in terms of written rules and hierarchical organization;
- Unstructured ROSCAs depend on the reliability of individuals and their social capital.