Contractual Structure and Endogenous Matching in Partnershipso

We analyze optimal contracts and optimal matching patterns in a simple model of partnership where there is a double-sided moral hazard problem and potential partners differ in their productivity in two tasks. It is possible for one individual to accomplish both tasks (sole production) and there are no agency costs associated with this option but partnerships are a better option if comparative advantages are significant. We show that the presence of moral hazard can reverse the optimal matching pattern relative to the first best, and that even if partnerships are optimal for an exogenously given pair of types, they may not be observed in equilibrium when matching is endogenous, suggesting that empirical studies on agency costs are likely to underestimate their extent by focusing on the intensive margin and ignoring the extensive margin.Endogenous matching, partnerships, contractual structure

Public-Private Partnership for the Provision of Public Goods: Theory and an Application to NGOs

This paper analyzes the role of public and private responsibility in the provision of public goods. We emphasise that a typical public good will require many different inputs which raises the possibility of partnerships to exploit comparative advantages of different parties. But hold-up problems due to contractual incompleteness in specifying tasks discourage separation of ownership and management. We extend our analysis to examine the role of project design or 'ideology' as a separate non-contractible input, and the possibility of crowding out in the form of a less caring government being elected , because of the presence of private providers. The main application developed here is to NGOs in developing countries which, in the last two decades, have been increasingly involved in various capacities in the provisions of a wide range of public goods and services.Public goods, non-governmental organizations, incomplete contracting, partnerships.

Trade and the Skill Premium Puzzle with Capital Market Imperfections

An interesting puzzle is that trade liberalization in the 1980s and 1990s has been associated with a sharp increase in the skill premium in both developed and developing countries. This is in contrast with neoclassical theory, according to which trade should increase the relative return of the relatively abundant factor. We develop a simple model of trade with capital market imperfections, and show that trade can increase the skill premium in both the North and the South, and both in the short run as well as in the long run. We show that trade with a skill-intensive economy has two effects: it reduces the skilled wage, and thus discourages non talented agents out of the skilled labor force; and it reduces the cost of subsistence, thus allowing the talented offspring of unskilled workers to go to school. This compositional effect has a positive effect on the observed skill premium, possibly strong enough to counterweight the decrease in the skilled wage.Trade Liberalization, Skill Premium, Credit Market Frictions, Latin America

Understanding why Hillary Clinton lost the election

How did Hillary Clinton lose the Electoral College in this year’s election, while at the same time winning the popular vote? Maitreesh Ghatak writes that to understand Clinton’s loss, we need to examine the groups of voters who do not have steady voting patterns: energized voters, swing voters, and new voters

Thanks for Nothing? Not-for-Profits and Motivated Agents

We re-examine the labor donation theory of not-for-profits and show that these organizations may exist not necessarily because motivated workers prefer to work in them, or that they dominate for-profits in terms of welfare, but because the excess supply of motivated workers makes the non-profit form more attractive to managers. We show that if firms had to compete for motivated workers then not-for-profit firms would be competed out by for-profit firms. Therefore, the choice between not-for-profit and for-profit provision is not always a question of resolving incentive problems but also one of distribution of rents between management and workers, and consequently, the relative scarcity of workers plays an important role in this choice.not-for-profits, intrinsic motivation, labor donation, free riding

The de Soto Effect

This paper explores the consequences of creating and improving property rights so thatfixed assets can be used as collateral. This has become a cause célèbre of Hernando de Sotowhose views are influential in debates about policy reform concerning property rights.Hence, we refer to the economic impact of such reforms as the de Soto effect. We explore thelogic of the argument for credit contracts, both in isolation, and in market equilibrium. Weshow that the impact will vary with the degree of market competition. Where competition isweak, it is possible that borrowers will be worse off when property rights improve. Wediscuss the implications for optimal policy and the political economy of policy reform.

Property Rights and EconomicDevelopment

This chapter develops a unified analytical framework, drawing on and extending theexisting literature on the subject, for studying the role of property rights in economicdevelopment. It addresses two fundamental and related questions concerning therelationship between property rights and economic activity. (i) What are themechanisms through which property rights affect economic activity? (ii) What arethe determinants of property rights? In answering these, it surveys some of the mainempirical and theoretical ideas from the extensive literature on the topic.Property rights, Economic development.

A murder is a murder, whatever the context

The death of Junaid Khan at the hands of a mob sparked rallies, followed by widespread criticism of the protesters. Maitreesh Ghatak writes that the danger of dismissing reactions against mob violence is that it perpetuates the view that everything is partisan political fight and references to human rights are just ruses to gain an advantage. He argues that while it is useful o question and understand the context of any incident, we should separate that from the issue of justice and recognise that no violent act is justified

No hope left? Interpreting the West Bengal election results

Last week saw a suprise landslide victory for the TMC in West Bengal. Maitreesh Ghatak assesses the drivers of the TMC victory and argues the Left parties in particular did badly because they failed to adapt to the reality that traditional land and trade-union centred policies for rural and urban areas respectively are largely irrelevant in present day Bengal. This article forms part of a series on the 2016 Legislative Assembly Elections. Click here to read more

The Land Acquisition Bill-- A Critique and a Proposal

The new Bill on land acquisition recently tabled in Parliament is well intentioned but seriously flawed. Its principal defect is that it attaches an arbitrary mark-up to the historical market price to determine compensation amounts. This will guarantee neither social justice nor the efficient use of resources. The Bill also places unnecessary and severe conditions on land acquisition, such as restrictions on the use of multi-cropped land and insistence on public purpose, all of which are going to stifle the pace of development without promoting the interests of farmers. We present an alternative approach that will allow farmers to choose compensation in either land or cash, determine their own price instead of leaving it to the government’s discretion, and also reallocate the remaining farmland in the most efficient manner. Our proposed method involves a land auction covering not only the project site but also the surrounding agricultural land.