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Showing posts from January, 2020

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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The Mythology and the Separating Equilibrium

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In game theory, separating equilibrium is a scenario wherein each player is forced to reveal his or her private information. In normal circumstances agents send out different signals for different contexts. The recipient would be served best if he or she are able to decode the true self of the messenger and the mess. Often, the hiding of private information and preferences by the agents is to enable them to counter posit the strategy of the rivals. Ideally, any strategy must be aimed to garner the private information and preferences of the agent. Implied is the true self of the agent must be revealed. For example to an insurance company the firm must be in a position to get the exact status of health information of the person doing the policy. The agent knowing a great deal of their health would obviously have incentives in hiding the information from the insurance company. For the firm, the ideal scenario is wherein, the agent has to reveal his or her true health status. The equili
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Shape and Structure of Big Tech

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In the US, the approaching elections has resulted in the rediscovery of the curse of bigness. The last major action sought was against Microsoft in the late 1990s and early 2000. However the end result rather than the intended split was a mere rap in the knuckles for Microsoft. There were threats of action during the Obama regime but very little concrete action. In contrast, during Obama, the big technology firms gained in size and market power. Currently, a bipartisan effort is underway to tame the ‘big-tech’, with most suggestions pinpointed on the splitting of big-tech. In orthodox dialect, big tech refers to Google, Apple, Facebook, Amazon and Microsoft. It however can be expanded to other firms also. Little dispute exists over the power build-up of these firms in the last decade or so. Facebook with its acquistions of Instagram and WhatsApp has virtually become undisputed in the social media space. Similarly through multiple approaches irrespective of ethicality or otherwis
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The Unsurprising Logic of People's Padma

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PM Narendra Modi government has transformed the shape and direction of Padma awards. A journey from what Harish Khare of the Hindu once described as the bent and beautiful to the ordinary India achievers seems to be here to stay. Achievers do not seek visibility but are guided by passion irrespective of the level they function. It should be unsurprising to see the winners from grassroots achievers, yet the elitist underpinnings of Lutyen’s patronage creates a sense of pleasant surprise glancing the list of Padma awardees in recent times. Beyond doubt, what Prof Subhash Sharma terms as capillary action, generates increasing returns of success is undisputed given the sheer population and diversity in India. What seems missing was the element of discovery and recognition of more and more Bharat as against India. In the erstwhile years, bestowing Padma awards was a product of strength of lobbying. It seemed inevitable given the selection mechanism and the subsequent post award benef
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China, Rationality and Pandemic Uncertainty

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The emergence of coronavirus in Chinese region of Wuhan and subsequent spread elsewhere in China and abroad is sending shockwaves. The governmental response is a shutdown of cities and provinces home to millions. It could not have come at a worse time given the holidays for Chinese lunar New Year. People would be travelling back home, to their ancestral places, to be with their friends etc. The virus has put paid to the plans and tourism industry is at a standstill. Worse, the panic seems to be gripping large scale population and upheavals not ruled out. Historically Chinese Communist Party has been secretive about the incidence and spread of virus and this adds to the rumours all around. Most accounts suggest, underreporting on casualties from the Chinese authorities, some even suggesting underreporting by factor 8-10. Setting aside the exaggerations, it can be safely assumed the reporting would be around 40-50% of the total cases in the best case scenario. Given the global travel
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Economics of Compulsory Safety Enforcement

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Certain things when made obligatory invite a recoil. An instance which is observed quite often when helmets are made compulsory for two wheeler riders. The rule is often in the rule book yet the enforcement keeps waxing and waning. Once in a while, the government issues a strict notice of wearing helmets, usually counter-reactions verbally hostile follow and after a cooling off period, the enforcement turns lax. Yet it is interesting to decode why the rule is essential. It is obvious wearing helmet improves personal safety and thus it should be in one’s own self-interest to wear a helmet voluntarily without a need for a rule. At least rationality in economics would assume so. However, life is not shades of white and black but shades of grey. To each individual it is the personal cost-benefit decision that matters. There is obvious discomfort in wearing a helmet. It might be so that it acts as a barrier to side view and to hearing. The benefits is obviously increased safety in case
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Institutional Disruption and Economic Downturn

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The budget documents have gone into print and all eyes are on Nirmala Sitaraman as she presents the Annual Budget for 2020-21 in the Lok Sabha on Feb 1. To state her task is arduous is perhaps an understatement. By most accounts, the budget of 2019-20 was let down in operational terms given the timing of the budget. The government fresh from an unprecedented election victory would have pressed for radical reforms but chose to state the vision without any corresponding reformist measures. Despite economic announcements, more of corrective response to economic happenings, doubts prevailed over the efficacy of the economic handling. To add to the woes, there was a sharp downturn with the GDP/GVA experiencing an abating growth for six consecutive quarters. Perceptibly, India’s economic woes were presumed to be its own creation despite global headwinds. As a matter of fact, the significant headwinds across the globe do not seem to be reaction to one single large crisis but to host of mic
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The Consequences of Woke Individual Liberalism

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The piece Diminishing Returns of Woke highlighted the counter reactions emerging towards imposition of wake culture. Political backlash is pretty visible, the backlash is spreading down to lower echelons of the society. Yet instances are being reported of woke liberals engaged in a witch hunt on the deviants from the alleged woke line. The case of an Ola driver to doctor in Kerala to an earlier instance of chef in the Gulf are pointers towards ‘micro-Dreyfuses’. An unpopular view of the same, however unfortunate it might be, is there will be victims of this battle. Foot-soldiers often pay the price and perhaps of higher magnitude in relative terms. Yet the cost of witch hunt would be significantly higher for woke liberals. To a woke liberal, long run success would be of conversion of ordinary human towards their side and if not at least not push him or her to the other side. This collective interest is at odds with the individual self-interest of woke liberal. He or she wants t
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Theorizing the R-Day Parade- Economics Approach

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January 26, the celebration of Republic Day has become synonymous with the military parade along the Rajpath. Besides being a tourist attraction it reinforces the sense of national pride and honour. While the Rajpath where the President takes the salute, is the cynosure of attention, the parade makes its way across parts of Delhi.   Yet, on and off, there have arisen questions over the necessity of parade.   It might not be far off when woke liberals might call for ending the parade on grounds of encouraging intense nationalism. To some in the right, it if often viewed as hangover of the Soviet style parades that dominated the Communist Soviet Union. Military parades are known to have existed for centuries with records documenting the same in Roman and Greek times. The modern counterparts are however, around a couple of centuries old, with the oldest perhaps commemoration of fall of Bastille. The evolution of parades is not uniform. Though objectives might be similar to varying
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Games State and Private Actors Play Jeff Bezos and the Indian Government

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Jeff Bezos visit to India was overshadowed by few related political incidences. One was ostensible refusal by both Prime Minister Modi and Commerce Minister Piyush Goyal to meet him. Secondly, there was a statement on Amazon attributed to Goyal. Apparently, Goyal had hinted Amazon was not doing any favour by investing in India and instead the investment was in their own self-interest. It might be a different matter that the statement was twisted as usual by the media over-eager to hit back at the government. Yet, for all the outwardly deceptiveness of protection of small grocers,  at the heart of the kerfuffle, was the seemingly biased reporting by Bezos owned Washington Post in recent times on India. An analysis of the same can be found in the piece ‘ WaPo and White Man’s Burden ’. Government industry relations have always been one of jigsaw puzzles. To the industry, government would be the forum where they would love to shop for protecting their domestic markets from foreign en
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Evolving Business Models from Pipeline to the Platform

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Alexander Osterwalder developed a canvas to decode business model of a firm. The simplicity and linearity in terms of its organization, made it convenient and popular to shape and comprehend the business models being operationalized at the firm level. The canvas grounded on the rectilinear business and thus the assumption behind pipeline nature of the underlying firm value chain. A representative canvas is illustrated below Source: the image is borrowed from Wikipedia for a mere illustration of the model.  At the core of the business model, is the value proposition which the firm offer to its customers. In absence of clarity on value proposition, the firm is bound to agonise in terms of its business sustenance.   The key driver of the pipeline business model is the assumed flow from producers to the customers, the association being the value proposition. To any firm, there has to be a clarity of its key activities. The key activities delineate its business presence.   For a
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Recapitalization, Economy and Moral Hazard

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The budget of FY 2020-21 is on the anvil. Incontestably, the Indian economy is performing below par. Without doubt, the Modi government has its task cut out in energising the animal spirits. Despite some contraction, there continues to exist a current account deficit. By almost all accounts, fiscal deficit is likely to breach the target. The high level of NPAs coupled with prospective NPAs are making banks reluctant to lend. Firms are saddled with high debt and thus unable to generate fresh investment. The reluctance of the banks to lend until existing balance sheets are cleaned is aggravating the problem. To add to the woes, is low capacity utilization thanks to lower aggregate demand. The NBFC collapse compounds the misery on the consumer lending front.   Partially, the decline in automobile sales is on account of contraction in lending by non-banking institutions. In the backdrop, economists and industry experts have argued for the recapitalization plan for the banks, housing
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The Economics of Segregation

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To be politically correct, ghettoization is taboo. Yet they not merely exist, they thrive. In colonial times segregation was imposed. Segregation in social economic and political was imposed top down in many societies at different points of history. The apartheid in South Africa, non-entry to Indians in certain clubs or roads during British era etc. were examples of enforced segregation. Yet in many other instances, segregation evolved organically, became an implicit barrier of entry even though there was no explicit barrier or enforcement of the same. The bottom-up evolution of segregation has perhaps interesting roots. Many times in real life, there is observed a kind of evolved segregation plausibly at subconscious levels. Take a simple example. There are many self-service ‘eat while standing’ hotels in India. One interesting observation is very few women frequent these eateries or ‘darshinis’ as they are called in South India.   It is usually male predominated. In management
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