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Showing posts with the label unintended consequences

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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Perverse Incentives!

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There is a proverbial story about snakes in Delhi. During British days, apparently there was a time when Delhi was infested with snakes. The authorities were challenged to find a solution to the snake menace. People respond to incentives and one might not take recourse to economics for the same and instead follow common sense. So the authorities announced a reward for all those who kill snakes. The condition was the dead snake has to be produced as proof for claiming reward. The story goes when the reward was stopped, Delhi was infested with far more snakes than it began with. In other words the problem had multiplied. Without doubt, one needs to look why the policy failed. Does this story remind us that economics is not infallible and incentive mechanism does not work? Let us probe it in some depth. As Adam Smith first pointed out, at least in documented modern times, people function in their self interest. The self interest as an aggregate is what culminates into enlightened c
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Economics and Policy Design- Right to Education

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The Right of Children to Free and Compulsory Education Act, 2009, popularly known as the Right to Education (RTE) Act, came into being in India from April 1, 2010 and is expected to lead to revolutionary change in the education delivery through schools in India. RTE mandates e very child from 6 to 14 years of age has a right to free and compulsory education in a neighborhood school till completion of elementary education. The economics of education rests on the fundamental premise of education being an investment.   Education is a good and has social benefits.   But pricing of education leaves the population groups unable to afford these fees outside the system. The market failure is visible and the government has to step in. There are four ways in which the government can influence the allocation of resources. In his celebrated ‘Code’ Larry Lessig presents the modes of Law, Market, Norms and Architecture to ensure the allocation or non – allocation of a resource. Let us tak
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