Ashok Kotwal

Credit as insurance in agrarian economies

Abstract This paper examines consumption credit as an insurance mechanism in agrarian economies. It explains the more rapid adoption of new technology in the Green Revolution by large farmers who had greater access to consumption credit. The paper also demonstrates how the emergence and expansion of consumption credit markets, by mitigating the need for hoarding in order to meet consumption contingencies, enhances growth by encouraging investment.

The Moral Hazard of Budget-Breaking

It has recently been suggested in the agency literature that moral hazard in teams can be dealt with by introducing a third party who breaks the budget-balancing constraint, and that this facilitates the design of contracts that can sustain the Pareto optimum as a (perfect) Nash equilibrium. This note offers an explanation for why the use of budget-breaking schemes is not so widespread as that of active monitoring, despite the fact that such schemes would save the resources expended on supervision. The note demonstrates that allowing the budget to be broken introduces the potential for moral hazard on the part of the third party, which could render the proposed equilibrium incredible.

A theory of real wage growth in LDCs

Abstract A general equilibrium framework is presented to explain a variety of developmental experiences. The demand side is modelled by assuming a system of preferences that incorporate Engels law in a stark way. The framework explains why poverty might be impervious to industrial progress in some countries. It also explains why countries which have been able to boost the exports of manufactured goods have been more successful in raising real wages in their economies than countries which have continued to export primary goods. The framework indicates how the initial conditions in terms of the level and distribution of wealth influence the growth of real wages in an economy.

Product quality and the theory of comparative advantage

Abstract We develop a simple model to investigate the possibility that two countries that differ significantly in income levels may be unable to gain from trading with each other. We consider two countries with identical preferences and different technologies. There are two types of goods: one homogeneous, and one quality-differentiated. We show that if one country has an absolute advantage in both types of goods, then no trade may be possible between the two countries, despite differences in relative autarky prices.

The role of the service sector in the process of industrialization

Abstract The goal of this paper is to examine the role of the service sector in the process of industrialization. We propose a model which recognizes that (non-traded) services are demanded by consumers as well as producers. Income increases thus lower production costs of industrial goods. The inclusion of non-traded services enables us to explain how a primary exporting economy can industrialize without resorting to protection. This paper can be construed as a formalization of some aspects of the Staple Theory of Growth.

Why Are Capitalists the Bosses

This paper addresses the question: why does capital typically hire labor rather than the other way around? It models a situation in which a capitalist (owner of money capital) can choose between lending out his capital for production and using it to set up production under his own supervision. It is demonstrated that the moral hazard of potential borrowers, on account of limited liability, provides the capitalist with the incentive to become a firm-owner, supervising hired labor. The capitalists choice is endogenized in terms of his opportunity cost of time. It is argued that moral hazard, with respect to the use of borrowed capital, is an important determinant of the social hierarchy in the workplace. Copyright 1989 by Royal Economic Society.

The role of consumption credit in agricultural tenancy

Abstract In traditional agriculture it is common practice for landlords to give consumption loans to their own tenants. If the tenant derives all his income from the landlord, it is puzzling that the landlors needs another means of expropriating the surplus; he could just raise the rent. The paper suggests that consumption credit may be a side payment designed to enable the landlord to absorb the tenants risk due to weather uncertainty without weakening his incentive to work. Tenancy is modelled as an agency contract designed in terms of information may be available to the landlord.

Export led development Primary vs. industrial exports

Abstract Trade with North can make South poorer if South is a primary exporter. Manufactured imports from North can cause a decline in the real wage and consequently lower the labour supply. The production possibility frontier and hence the GNP of South can shrink while that of North can expand. If South gains comparative advantage in manufactured goods and reverses the trade pattern it can turn the tables on North. The analysis, based on a theoretical model, suggests a way to reconcile the divergent views on the desirability of North-South trade.

Demand externality and industrial productivity growth in LDCs

Since the industrial sectors of LDCs tend to be highly concentrated, productivity enhancing activities of individual firms generate significant demand spillovers. This paper offers a theoretical analysis of how these demand spillovers and industrial productivity growth are related. Conglomeration is shown to lead to a Pareto-improvement. It is also shown that Stackelberg leadership by one of the sectors would result in an outcome that dominates the Nash outcome. It is suggested that the strategy of industrialization followed by Japan and South Korea could, perhaps, be interpreted in the light of the above results.

The Political Economy of Underinvestment in Agriculture

A simple model of political economy is constructed to capture the following view: Owners of sector-specific factors form political lobbies in order to influence government policy within the perimeter defined by the existing paradigm.