Mukesh Eswaran

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.

Endogenous Cartel Formation

This paper investigates the endogenous formation of cartels in a supergame framework in which cheating on the cartel agreement results in the ejection of only the defector from the cartel while collusion continue s amongst the non-cheating members. A more sophisticated notion of cartel stability than has been analysed hitherto is developed here, and it is shown that cartels are even less stable than they are generally believed to be. When firms produce heterogeneous goods and set prices, cartels comprising a small fraction of the industrys firms are shown to be viable. The emergence of two or more cartels within the same industry is seen not only to be a distinct possibility but also to be quite likely

Cross-Licensing of Competing Patents as a Facilitating Device

This paper hypothesizes that, when their products are imperfect substitutes, firms can promote collusion by cross-licensing their competing patents. Cross-licensing is shown to enhance the degree of collusion achieved in a repeated game by credibly introducing the threat of increased rivalry in the market for each firms product. The paper then examines the consistency of the theory developed with the available evidence. Antitrust implications of the practice of cross-licensing of competing patents are discussed.

Technology-Traditing Coalitions in Supergames

We attempt to explain the observation that rival firms often share their technologies. We show that the trading of technical information over the long haul can be sustained as an equilibrium in supergames. The strategy of ejection of a cheating firm from a technology-trading coalition, followed by the continuation of technology trading by the noncheating members, better facilitates trading than does a strategy in which cheating results in the dissolution of the coalition. Technology trading is often welfare improving, and firms may form small coalitions.

Exhaustible resources and alternative equilibrium concepts

We compare the open loop and feedback Nash equilibria that obtain in oligopolistic resource markets when the resource is exhaustible and privately owned. When the resource is common property, the two equilibrium concepts are known to yield significantly different results. Under the regime of private property, the choice of equilibrium concept does not appear to be as important. Restricting our attention to the cases of iso-elastic demand (and zero extraction costs) and linear demand (and quadratic extraction costs) we identify instances where the open loop and feedback Nash equilibria coincide and demonstrate that in other cases the two equilibria do not differ significantly.

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.

On the Nonexistence of Market Equilibria in Exhaustible Resource Markets with Decreasing Costs

This paper examines the existence of competitive equilibria in markets for exhaustible resources where there are initial economies of scale in either the extraction of the resource or the utilization of the resource as an input in production. In such instances, which are fairly common, we find that the classic Hotelling rule for competitive extraction does not apply, since competitive price equilibria generally do not exist. This is in marked contrast to static markets where the usual textbook example of firms with U-shaped average cost curves is not inconsistent with the existence of competitive equilibria. Furthermore, oligopolistic market equilibria in which resource firms act as Nash producers may also fail to exist when there are returns to scale in production.

Licensees as Entry Barriers

In a more general setting than has been considered hitherto, this paper examines how the incumbent in a market threatened by entry can exploit its first-mover advantage by licensing its technology not to a potential entrant but to firms that would have remained outside the industry. It is shown, among other things, that the incumbent may subsidize the variable costs of its licensees in order to deter entry. Even when entry is not deterred, it is demonstrated that the incumbent might opt to invite outsiders as licensees.