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The Babu and the Boxwallah : Managerial Incentives and Government Intervention in a Developing Economy
Author(s) -
Basu Kaushik,
Ray Tridip,
Ghosh Arghya
Publication year - 1997
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/1467-9361.00006
Subject(s) - delegate , economics , incentive , monopoly , economic interventionism , microeconomics , government (linguistics) , tax revenue , revenue , profit (economics) , public economics , finance , politics , computer science , political science , law , programming language , linguistics , philosophy
In developing economies a firm’s 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.