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

REVIEW OF DEVELOPMENT ECONOMICS, October 21, 1996

Posted: 15 Jan 1997

See all articles by Kaushik Basu

Kaushik Basu

Cornell University - Department of Economics; IZA Institute of Labor Economics; Brookings Institution

Arghya Ghosh

UNSW Australia Business School, School of Economics

Tridip Ray

Indian Statistical Institute, New Delhi - Delhi Centre

Abstract

In developing economies firm strategy is directed more often at governments than at other competing firms. As an initial step towards modeling such interactions, this paper considers a situation where government confronts a monopoly. The latter chooses price and maximizes profit, and the former chooses a tax rate and maximizes tax revenue. We allow government and the monopoly to 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 an industrial setting is likely to exhibit greater inefficiencies than that which arises in standard models.

JEL Classification: O20, D70

Suggested Citation

Basu, Kaushik and Ghosh, Arghya and Ray, Tridip, The Babu and the Boxwallah: Managerial Incentives and Government Intervention in a Developing Economy. REVIEW OF DEVELOPMENT ECONOMICS, October 21, 1996. Available at SSRN: https://ssrn.com/abstract=4559

Kaushik Basu (Contact Author)

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-2525 (Phone)
607-255-2818 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Arghya Ghosh

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Tridip Ray

Indian Statistical Institute, New Delhi - Delhi Centre ( email )

7 S .J. S.
Sansanwal Marg
New Delhi, 110016
India

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