Tridip Ray

Bank-based versus market-based financial systems: A growth-theoretic analysis

We study bank-based and market-based financial systems in an endogenous growth model. Lending to firms is fraught with moral hazard as owner-managers may reduce investment profitability to enjoy private benefits. Bank monitoring partially resolves the agency problem, while market-finance is more ‘hands-off’. A bank-based or market-based system emerges from firm financing choices. It is not possible to say unequivocally which of the two systems is better for growth. The growth rate depends, crucially, on the efficiency of financial and legal institutions. But a bank-based system outperforms a market-based one along other dimensions. Investment and per capita income are higher, and income inequality lower, under a bank-based system. Bank-based systems are more conducive for broad-based industrialization. A temporary income redistribution, under both financial systems, results in permanent improvement in per capita income as well as income distribution.

Limited liability, contractual choice, and the tenancy ladder

Abstract We re-examine the connection between limited liability, contractual form and the agricultural tenancy ladder in a model with only labor moral hazard. We show that ex post limited liability does not explain sharecropping in this model, but that ex ante limited liability can do so. We characterize the nature of the tenancy ladder in either case.

OPTIMAL PROCUREMENT STRATEGY UNDER SUPPLY RISK

With the rapid expansion of global business, newer suppliers with cheaper but possibly unreliable technologies have entered the marketplace to win orders from buyer firms by beating the price of their perfectly reliable (but expensive) competitors. We model the procurement problem as a Nash game where the buyer has to allocate its purchases between an expensive but reliable supplier, and a cheaper but unreliable supplier. The suppliers specify prices for different proportions of the order awarded to them. Our analysis shows that, when perfect information is available about the reliability level of the unreliable supplier, the Nash equilibrium is a sole-sourcing allocation and that the supplier selection decision depends on the reliability and cost differentials between the two suppliers. In addition, we model the case when the buyer and the reliable supplier have limited information about the reliability of the unreliable supplier. Even in such an asymmetric scenario, the buyers equilibrium allocation is a sole-sourcing outcome, but depending on system conditions either a separating or a pooling equilibrium is possible. An interesting insight into the effect of information asymmetry is that it can result in higher or lower profits/costs for the channel partners (compared to the perfect information case). As such, the buyer may even benefit from information asymmetry regarding unreliable supplier due to its impact on the degree of competition between the two suppliers.

Share tenancy as strategic delegation

Abstract The paper develops a new explanation of sharecropping based on the idea of an incentive equilibrium. It considers a set-up in which a few landlords in a village confront the choice of cultivating their farms by adopting different tenurial arrangements, ranging from owner operation, through the fixed-rental system to sharecropping. These landlords are the only sources of employment in the village, and compete in the wages they pay to their workers. In such an environment sharecropping is explained as a form of strategic delegation where a landlord gets extra benefit by having a share tenant and giving him suitable incentives.

The Babu and the Boxwallah: Managerial Incentives and Government Intervention in a Developing Economy

In developing economies a firms strategy is directed more often at the government than at other competing firms. As an initial step towards modeling such interactions this paper considers a situation where a government confronts a monopoly. The latter chooses price and maximizes profit and the former chooses a tax rate and maximizes tax revenue. The government and the monopoly can delegate the final decision-making to, respectively, a bureaucrat and a manager. The incentive equilibrium of the model is characterized. it is shown that this kind of industrial setting is likely to exhibit greater inefficiencies than that which arises in standard models. Copyright 1997 by Blackwell Publishing Ltd

New and Enduring Themes in Development Economics

This book is a compilation of selected papers presented at the ISI (Indian Statistical Institute) Platinum Jubilee Conference on Comparative Development held at the ISI, Delhi, India. The papers cover new and well-established topics in development economics. Some of these include political economy, role of public outrage in delivering justice and the political economy of general strikes, economics of happiness, economics of labour, agricultural economics, macroeconomics and public finance. These topics are analyzed from the perspective of developing countries. The book will be of interest to both researchers and graduate students in development economics.

A Procurement Auction Model Under Supplier Uncertainty

As business-to-business commerce shifts to the Internet, newer suppliers with cheaper but unreliable technologies enter the market place to win orders from firms by beating the price of their perfectly reliable (but expensive) competitors. The dilemma facing purchasing firms is the allocation of the tender across suppliers of varying supply reliability. We model the procurement problem as a sealed-bid auction where the buyer has to allocate purchases between an expensive but reliable supplier and a cheaper but unreliable supplier, and the suppliers specify prices for different proportions of the tender awarded to them. A unique feature of our model is that it allows the purchasing firm to reserve the right to change the size of the total tender awarded depending on the nature of the bids received from the suppliers. We prove that the set of Nash equilibrium outcomes coincides with the set of efficient outcomes, and for strictly convex cost functions, the outcome is unique. Further, we show that the possibility of implicit supplier collusion is strengthened in that the suppliers may structure their bids forcing the buyer to allocate the tender resulting in the worst-case (highest price) scenario for him. We also show that the Anton-Yao (A-Y, 1989) model can be interpreted as a limiting case of our model and that the efficient outcome derived in this paper is the only robust outcome in the A-Y model.

Negative Reality of the HIV Positives: Integrating Mental Health in Welfare Evaluation

Using primary household data we estimate family utility function parameters that measure the relative importance of consumption, schooling of children and health (both physical and mental) and find that mental health is far more important than consumption or childrens schooling in determining household utility. We then estimate the monetary equivalent of the welfare loss to an HIV family to be Rs. 65,690 per month. Aggregating to the all India level we find that the annual welfare loss due to the only 0.9% prevalence of HIV/AIDS is a staggering 3,800 billion rupees per year, which is about two and a half times the annual health expenditure of the country in 2004 and 13.4% of its GDP! This huge magnitude is not surprising as it includes private valuation of ones own life as well as the cost of stigma for being HIV positive. In addition, the annual loss from external transfers (through debt, dissavings and social insurance) account for 5% of annual health expenditure and 0.23% of GDP. The significance of mental health can be gauged from the fact that had we not included it in the family welfare analysis, the welfare loss would have been just about 0.067% of GDP.

Negative Reality of the HIV Positives: Evaluating Welfare Loss in a Low Prevalence Country

Using primary household data from India we estimate family utility function parameters that measure the relative importance of consumption, schooling of children and health (both physical and mental) and find that mental health is far more important than consumption or children’s schooling in determining household utility. We then estimate that the monetary equivalent of the welfare loss to an HIV family is Rs. 66,039 per month, whereas the losses to an HIV male and female are Rs. 67,601 and Rs. 65,120 per month respectively. These figures are huge given that the average per capita consumption expenditure of the families in our sample is just Rs. 1,019 per month. This huge magnitude is not surprising as it includes private valuation of one’s own life as well as the cost of stigma for being HIV positive. In addition, the annual loss from external transfers (through debt, sale of assets and social insurance) accounts for 2.6% of annual health expenditure and 0.12% of GDP in 2004. The significance of mental health in welfare evaluation can be gauged from the fact that, for an average HIV family, a whopping 74% of the welfare loss comes from aspects of mental health.