Institutions and Organizations

Displaying 34 Items

Too Good To Be True? Retention Rules for Noisy Agents

(with Francisco Espinosa), revised September 2020. Supplementary Appendix.

Summary. An agent who privately knows his type (good or bad) seeks to be retained by a principal. A principal seeks to retain good agents. Agents signal their type with some ambient noise, but can alter this noise, perhaps at some cost. Our main finding, that we examine in several extensions, is that in equilibrium,  the principal treats extreme signals in either direction with suspicion, and retains the agent if and only if the signal falls in some intermediate bounded set. In short, she follows the maxim: “if it seems too good to be true, it probably is.”  

Conveying Value Via Categories

(with Paula Onuchic), October 2019.

A sender is about to come into possession of an object of heterogeneous quality. Prior to knowing that quality, she commits to a categorization. That is, she partitions the set of qualities into  subsets — some possibly singletons — and verifiably commits to reveal the element in which the quality belongs. The categories  must be monotone. Our main results fully describe the profit-maximizing categorization  for any pair of priors over object quality held by sender and receiver. We apply these results to the design of educational grades.

A Sovereign Fund for India

(with Parikshit Ghosh), October 2019.

We propose that India build up a sovereign fund, to be invested in portfolios of equity, bonds and other financial assets, and managed professionally as any fund would be managed, subject to certain constraints that we describe in this paper. The proposal to access Indian corporate value consists of two parts: I. A one-time directive that will require every publicly traded Indian company to issue new shares to the government, equal to some fraction (say 10–20%) of their outstanding shares in the mar- ket. II. An ongoing obligation to transfer some given fraction (again 10–20%) of every new share issue — whether in the form of an initial public offering or an expansion of the existing share base — to the India Fund.

Certified Random: A New Order for Co-Authorship

(with Arthur Robson), American Economic Review 108, 489–520 (2018).

Summary. Certified random order (a) distributes the gain from first authorship evenly over the alphabet, (b) allows either author to signal when contributions are extremely unequal, (c) will invade an environment where alphabetical order is dominant, (d) is robust to deviations, (e) may be ex-ante more efficient than alphabetical order, and (f) is no more complex than the existing alphabetical system modified by occasional reversal of name order.

Conflict and Development

(with Joan Esteban) Annual Reviews of Economics  9, 263-293, 2017.

Summary. In this review, we examine the links between economic development and social conflict. By economic development, we refer broadly to aggregate changes in per capita income and wealth or in the distribution of that wealth. By social conflict, we refer to within-country unrest, ranging from peaceful demonstrations, processions, and strikes to violent riots and civil war. We organize our review by critically examining three common perceptions: that conflict declines with ongoing economic growth; that conflict is principally organized along economic differences rather than similarities; and that conflict, most especially in developing countries, is driven by ethnic motives.

Information and Enforcement in Informal Credit Markets

(with Parikshit Ghosh), Economica 83, 59–90, 2016.

Summary. We study loan enforcement in informal credit markets with multiple lenders but no sharing of credit histories, and derive the dynamics of loan size and interest rates for relational lending. In the presence of a sufficient fraction of ‘natural defaulters’, the rest of the market can be incentivized against default by micro-rationing—sharper credit limits and possibly higher interest rates that serve as gateways into new borrowing relationships. When there are too few natural defaulters in the market, this can be supplemented by macro-rationing—random exclusion of some borrowers. When information collection is endogenized, multiple equilibria may arise. (Published version of unpublished notes from 2001.)

Gender Differentials in Eye Care: Access and Treatment

(with Rajshri Jayaraman and Shing-Yi Wang), Economic and Political Weekly 49 No. 25, June 21, 2014. 

Summary. Two potential sources of gender bias in health care are (a) females access treatment later than males and (b) they receive differential care at the medical facility. We explore both of these for eye care at a large Indian medical facility.  At presentation, women have worse diagnoses than men for indicators of symptomatic illness, such as myopia and cataract. There is no difference in treatment.

A Remark on Color-Blind Affirmative Action

(with Rajiv Sethi), Journal of Public Economic Theory 12, 399-406, 2010.

Summary. Elite educational institutions have turned to criteria that meet diversity goals without being formally contingent on applicant identity. Under weak and generic conditions, such color-blind affirmative action policies must be nonmonotone in student test scores.

Informal Insurance in Social Networks

(with Francis Bloch and Garance Genicot), Journal of Economic Theory 143, 36-58, 2008.

Summary. This paper studies bilateral insurance schemes across networks of individuals.  We investigate the structure of self-enforcing insurance networks. Network links play two distinct and possibly conflictual roles. They act as conduits for both transfers and information; affecting the scope for insurance and the severity of punishments upon noncompliance. Their interaction leads to a characterization of stable networks as suitably “sparse” networks. Thickly and thinly connected networks tend to be stable, whereas intermediate degrees of connectedness jeopardize stability.

Group Decision-Making in the Shadow of Disagreement

(with Kfir Eliaz and Ronny Razin), Journal of Economic Theory 132, 236–273, 2007.

Summary.  A model of group decision-making is studied, in which one of two alternatives must be chosen. Our model is distinguished by three features: private information regarding valuations, differing intensities in preferences, and the option to declare neutrality to avoid disagreement. There is always an equilibrium in which the majority is more aggressive in pushing its alternative, thus enforcing their will via both numbers and voice. However, under general conditions an aggressive minority equilibrium inevitably makes an appearance, provided that the group is large enough. Such equilibria invariably display a “tyranny of the minority”: the increased aggression of the minority always outweighs their smaller number, leading to the minority outcome being implemented with larger probability than the majority alternative.


Inequality and Inefficiency in Joint Projects

(with Jean-Marie Baland and Olivier Dagnelie), Economic Journal 117, 922-935, 2007.

SummaryA group of agents voluntarily participates in a joint project, in which efforts are not perfectly substitutable. The output is divided according to some given vector of shares. A share vector is unimprovable if no other share vector yields a higher sum of payoffs. We describe unimprovable share vectors.

Reciprocity in Groups and the Limits to Social Capital

(with Francis Bloch and Garance Genicot), American Economic Review 97 (Papers and Proceedings), 65–69, 2007.

Summary. Based on our earlier work on risk sharing in groups and networks (Garance Genicot and Debraj Ray, 2003, 2005 and Francis Bloch, Garance Genicot and Debraj Ray, 2006), this paper proposes a simple model of mutual help in groups and networks. We argue that, if social capital can promote cooperation among groups of individuals, it can also hurt it. When groups of individuals can jointly deviate from a social norm, the fact that they have built strong ties among themselves may in fact make deviations easier, and weaken cooperation in society as a whole.

Contracts and Externalities: How Things Fall Apart

(with Garance Genicot), Journal of Economic Theory 131, 71-100, 2006.

Summary. A single principal interacts with several agents, offering them contracts. The outside-option payoffs of the agents depend positively on how many uncontracted or “free” agents there are. We study how such a principal, unwelcome though he may be, approaches the problem of contract provision to agents when coordination failure among the latter group is explicitly ruled out. Agents cannot resist an “invasion” by the principal and hold to their best payoff. It is in this sense that “things [eventually] fall apart”.

Inequality, Lobbying, and Resource Allocation

(with J. Esteban), American Economic Review 96, 257–279 (2006). Supplementary Notes.

Summary. This paper describes how wealth inequality may distort public resource allocation. A government seeks to allocate limited resources to productive sectors, but sectoral productivity is privately known by agents with vested interests in those sectors. They lobby the government for preferential treatment. The government—even if it honestly seeks to maximize economic efficiency—may be confounded by the possibility that both high wealth and true economic desirability create loud lobbies. Broadly speaking, both poorer economies and unequal economies display greater public misallocation. The paper warns against the conventional wisdom that this is so because such governments are more “corrupt.”

Informal Insurance, Enforcement Constraints, and Group Formation

(with Garance Genicot), in G. Demange and M. Wooders (eds), Network and Group Formation, Cambridge: Cambridge University Press, 2005.

Summary. This paper, largely based on Genicot and Ray (2003), discusses group formation in the context of informal insurance arrangements with enforcement constraints.

Group Formation in Risk-Sharing Arrangements

 (with Garance Genicot), Review of Economic Studies 70, 87-113, 2003.

SummaryWe study informal insurance within communities, explicitly recognizing the possibility that subgroups of individuals may destabilize insurance arrangements among the larger group. We therefore consider self-enforcing risk-sharing agreements that are robust not only to single-person deviations but also to potential deviations by subgroups. Variant on an Example in the paper. A conjecture related to the paper.

Collective Action and the Group Size Paradox

(with Joan Esteban), American Political Science Review  95, 663–672, 2001.

SummaryAccording to the Olson paradox, larger groups may be less successful than smaller groups in furthering their interests. We address the issue in a model with three distinctive features: explicit intergroup interaction, collective prizes with a varying mix of public and private characteristics, and nonlinear lobbying costs. The interplay of these features leads to new results. When the cost of lobbying has the elasticity of a quadratic function, or higher, larger groups are more effective no matter how private the prize. With smaller elasticities, a threshold degree of publicness is enough to overturn the Olson argument, and this threshold tends to zero as the elasticity approaches the value for a quadratic function. 

Coalitional Power and Public Goods

(with Rajiv Vohra), Journal of Political Economy 109, 1355-1384, 2001.

Summary. We study the provision of public goods when all agents have complete information and can write binding agreements. The focus is on coalition formation as a potential source of inefficiency.

Inequality, Control Rights, and Rent Seeking: Sugar Cooperatives in Maharashtra

(with Abhijit Banerjee, Dilip Mookherjee and Kaivan Munshi), Journal of Political Economy 109, 138-190, 2001.

SummaryThis paper presents a theory of rent seeking within farmer cooperatives in which inequality of asset ownership affects relative control rights of different groups of members. . Predictions concerning the effect of the distribution of local landownership on sugarcane price, capacity levels, and participation rates of different classes of farmers are confirmed by data from nearly 100 sugar cooperatives in the Indian state of Maharashtra over the period 1971–93.

Credit Rationing in Developing Countries: An Overview of the Theory

(with Parikshit Ghosh and Debraj Ray), Chapter 11 in Readings in the Theory of Economic Development, edited by Dilip Mookherjee and Debraj Ray, London: Blackwell, 383–301l, 2000.

Summary. This paper surveys the theoretical development literature on credit markets.

Wealth Constraints, Lobbying and the Efficiency of Public Allocation

(with Joan Esteban), European Economic Review 44, 694-705, 2000.

Summary. We formalize a model in which individuals lobby before the government in order to bene”t from some productivity-enhancing government action (infrastructures, direct subsidies, permissions, in short). The government honestly tries to allocate these permissions to the agents that will make the best use of them, as revealed by the intensity of their lobbying. If the marginal cost of resources varies with wealth, the amount of information transmitted through lobbying will depend on the degree of inequality. In this paper, we summarize the main approach and examine the special case of equal wealth. We show that the nature of signaling equilibria is critically a!ected by per-capita wealth.

Vertical Linkages between Formal and Informal Financial Institutions

(with Maria Floro), Review of Development Economics 1, 34-56, 1997.

Summary. The paper investigates vertical linkages between formal and informal financial institutions. Specifically, it studies a policy that expands formal credit to informal lenders, in the hope that this will improve loan terms for borrowers who are shut out of the formal sector. Special attention is paid to the Philippines. It is argued that the effects of stronger vertical links depend on the form of lender competition. In particular, if the relationship between lenders is one of strategic cooperation (sustained by threats of reprisal in a repeated setting), an expansion of formal credit may worsen the terms faced by informal borrowers.

Egalitarianism and Incentives

(with Kaoru Ueda), Journal of Economic Theory 71, 324-348, 1996.

Summary. A group of agents is collectively engaged in a joint productive activity. Each agent supplies an observable input, and output is then collectively shared among the members according a social welfare function. However, individual actions are taken on a selfish basis, and the collective decision is only made after inputs are chosen. This leads to inefficiency. The aim of this paper is to show formally that, contrary to popular belief, the degree of inefficiency decreases in the extent of egalitarianism embodied in the social welfare function.

Cooperation in Community Interaction without Information Flows

(with Parikshit Ghosh), Review of Economic Studies 63, 491–519, 1996.

Summary. We study cooperative behavior in communities where the flow of information regarding past conduct is limited or missing. Players are initially randomly matched with no knowledge of each other’s past actions; they endogenously decide whether or not to continue
the repeated relationship. We define social equilibrium in such communities. Such equilibria
are characterized by an initial testing phase, followed by cooperation if the test is successful. It is precisely the presence of myopic types that permit cooperation, by raising barriers to entry into new relationships.

Labor Tying

(with Anindita Mukherjee), Journal of Development Economics 47, 207-239, 1995.

Summary. The co-existence of seasonal fluctuations in income and imperfect credit markets suggests that tied contracts should dominate rural labor markets. However,  empirical observation from India suggests that this is far from being the case, and indeed, that there is a declining trend in  labor tying. In our model,  casual labor markets are always active despite the presence of  seasonality, and a variety of implications are derived that  link economic growth, changing information flows, and the decline of labor tying over time.

Efficient Monetary Equilibrium in the Overlapping Generations Model

(with Joan Esteban and Tapan Mitra), Journal of Economic Theory  64, 372–389, 1993.

Summary. This paper characterizes equilibria with public debt in the overlapping generations model in which (a) money has a positive price and (b) the resulting intertemporal allocation is efficient. We identify a necessary and sufficient condition for (a) and (b), which states, loosely speaking, that the public debt must not grow “too fast.”

On the Economic Theory of Quantity Controls

(with Arunava Sen), in K. Basu and P. Nayak (eds.), Economic Theory and Development, Oxford University Press, 1992.

Summary. We study when quantity controls are needed for decentralization of Pareto-optima.

On the Competitive Pressure Induced by the Diffusion of Innovations

(with Dilip Mookherjee), Journal of Economic Theory 54, 124-147, 1991.

Summary. We consider the decision of a dominant firm to adopt a sequence of potential cost-reducing innovations, where the latest technology adopted diffuses to a competitive fringe at an exogenous rate. With price competition on the product market, the leader optimally spaces apart the adoption dates of successive innovations, so the industry is characterized by cycles of alternating innovation and diffusion. These results may, however, be reversed in the case of quantity competition.

Collusive Market Structure Under Learning-by-Doing and Increasing Returns

(with Dilip Mookherjee), Review of Economic Studies 58, 993-1009, 1991.

Summary. Learning-by-doing and increasing returns are often perceived to have similar implications for market structure and conduct. We analyze this assertion in the context of an infinite-horizon, price-setting game.

El Aprendizaje en el Trabajo y la Estructura Industrial del Mercado: Un Panorama

(with Dilip Mookherjee), El Trimestre Económico 58, 139-162 .l, 1991.

Summary. Follow-up on Mookherjee and Ray (Review of Economic Studies 1991). The article continues to discuss learning by doing and the possibility of collusive behavior among firms. An English version of this article appears as “Learning-by-Doing and Industrial Competition,” in B. Dutta et al. (eds.), Theoretical Issues in Economic Development, Oxford University Press, 1992.

Increasing Returns, Economic Growth and Decentralization

(with Mukul Majumdar), in B. Dutta, S. Gangopadhyay, D. Mookherjee and D. Ray (eds), Economic Theory and Policy: Essays in Honor of Dipak Banerjee, Oxford University Press, 1990.

Summary. We discuss quantity controls that can be used for decentralization of competitive economies with non-convex production sets.

Repeated Principal-Agent Games with Eviction

(with Bhaskar Dutta and Kunal Sengupta), in P. Bardhan (ed.), The Economic Theory of Agrarian Institutions, Clarendon Press, Oxford (1989).

Summary. We study repeated principal-agent problems in which the agent can be evicted and replaced by another identical agent. Thus current output, which is perfectly observed, can be used for incentives as well as efficiency wages. We describe conditions under which eviction threats will be used in equilibrium, in addition to output-based incentives.

Interlinkages and the Pattern of Competition

(with Kunal Sengupta), in P. Bardhan (ed.) The Economic Theory of Agrarian Institutions, Clarendon Press, Oxford, 1989.

Summary. This paper provides a broad set of conditions interlinked contracts will not be observed. These conditions are given to throw better light on the circumstances in which interlinkage will indeed be observed.