Volume-04 ISSN: 2455-3085 (Online) Issue-06 RESEARCH REVIEW International Journal of Multidisciplinary June-2019 www.rrjournals.com[UGC Listed Journal]

The theory: Policy and regulatory design for developing countries ( India)

Shubhra Suman

MA (Economics), School of Economics, , Delhi

ARTICLE DETAILS ABSTRACT Article History Developing countries like India are faced with the problem of accelerating the rate of Published Online: 04 June 2019 development while grappling with resource constraints, structural imbalances and many socio-economic problems like poverty and illiteracy. The current research in Economic Keywords Theory has tended to address the specific problems of developing countries. There are Mechanism design , public policy, conflicting social preferences like equality and parity, ethical behaviour, honesty, motivation development, India. for good government which may be in conflict with private goals and self-interest. In such a scenario the planner is faced with conditions of maximising social welfare in face of hidden motive or information. Mechanism theory in conjugation with development in technology, provides a means of finding optimal solutions to such constrained situations. Due to this it has great applicability to countries like India. This article throws light on some aspects of mechanism design and its policy implications providing a basis for its widespread use in

current economic situation.

1. Introduction decision problem, such as the allocation of work in a team, the Mechanism design or is a allocation of spectrum for mobile telephony or funding for relatively new field of economics which has been gaining public schools; A measure of quality to evaluate any candidate importance lately. Its beginnings are traced to the 1960s solution, for example efficiency, profits or social welfare; A when considered a very policy-oriented description of the resources – informational or otherwise – problem - that when information is wide spread among many held by the participants. A mechanism specifies the set of people but the planning authority or planner may not have messages that participants can use to transmit information access to the same then how should a decision be reached in and the decision that will be taken conditional on the order to maximise social benefits? It is essentially a normative messages that are sent. Once a mechanism is in place, concept aimed at achieving certain objectives similar to participants effectively “play a game” where they send enhancement of societal welfare. In 2007, the messages (e.g., a bid in an auction) as a function of their SverigesRiksbank prize (Nobel Prize in Economic Sciences) information. The goal is to find a mechanism with an was awarded to Leonid Hurwicz, , and Roger equilibrium decision outcome (sometimes required to be Myerson for their fundamental contributions to mechanism unique) that is best according to the given measure of quality. design theory. The strength of mechanism design lies in its generality: any It is the ‘engineering’ aspect of economics where the procedure, market-based or not, can be evaluated within a ‘mechanisms’ or ‘institutions’ or ‘processes’ are designed to unified framework (Legros& Cantillon, 2007). achieve social objectives. It has a wide array of applications and mechanism design (often called from designing voting mechanisms to auction design. reverse game theory) have played a significant role in a large Interestingly Mechanism Design is also called ‘reverse game number of spheres of matching markets with socially theory’ as it deals with cases of information asymmetry. important applications such as competitive matching of According to Hurwicz, in order to resolve any solution the colleges with students and hospitals with interns, leading to planner should take into account the incentives of self- maximization of social welfare. They have also saved precious interested agents, i.e., the people on whose information the human lives through better and faster matching of kidneys and decision relies must find it in their interest to reveal that human organs(Narhari, 2014). information. This was a revolutionary idea at the time and found many takers mainly in context of market forms- 2. Theory of mechanism design socialism vs capitalism. Hurwicz’s analysis pointed out that Mechanism design deals with information asymmetry, lack of proper individual incentive was a major weakness of which can be compared to ‘games of incomplete information’ the socialist market system, while in case of capitalism there i.e. where all the parties do not have full information. Such was no proper alignment between individual incentives and games may consists of two broad forms of games viz. games social incentives. Maskin and Myerson developed the theory of ‘hidden information’ and games of ‘hidden action’. ‘Hidden further in the 1970s and 1980s by expanding on the ideas of information’ arises in cases where one party has superior along with Implementation Theory and information or has information that the other does not have Auction Designs respectively. access to. The case of sale of second-hand cars is an In its current form, mechanism design theory provides a example of hidden information as the seller (owner of the car), general framework to study any collective decision problem. A knows more about the performance/condition of the car than mechanism design problem has three key inputs: A collective the buyer. Various similar hidden information scenarios arise

RRIJM 2015, All Rights Reserved 1777 | P a g e Volume-04, Issue-06,June-2019 RESEARCH REVIEW International Journal of Multidisciplinary in society everyday. For example, a prospective employee First, the beneficiaries may understate the amount they knows more about her own capabilities than the employer, the are willing to pay (i.e. under-report their true benefits). This is insured is better aware of her health condition than the done to ‘free ride’ since the project will benefit them anyway insurer, bidders are better aware of their own values for the even if they pay less. Second, there are those who will be auctioned item than the auctioneer, the voters are better adversely affected by the bridge and need to be aware of their own preference than the government, etc. compensated. These may include not only workers but people When a company is hiring a person, the company has less who lose land or access to a good view, etc. An appropriate information compared to the person about his abilities and mechanism must address these problems and ensure that the motivation. outcome is such that the welfare is enhanced. ‘Hidden action’ arises when one party (generally called Secondly, there are various ways (mechanisms) by which the ‘principal’) is not able to observe the actions of the other the transfer of resources can be done. The government can party (usually called ‘agent’). Thus, the government may not give it out on a ‘first come first served basis ’(e.g. this was be able to observe when a tax official accepts a bribe, the done in the allocation of 2G spectrum in India). Alternatively, insurer may not be able to observe whether the insured takes the prospective parties can be asked to make presentations reasonable precautions, the employer may not know when the as to how they would use the resources and their capabilities. employee is lax, etc. The hidden actions of the ‘agents’ The empowered committee would subsequently make a adversely affects the ‘principal’. choice. Another method is to ‘auction ’the resource to the In either form of information asymmetry, there are highest bidder. The auctioning design can be of various types essentially two parties — one with complete information and (e.g. open auction, Dutch sealed bids). the other with guesses or beliefs which can be updated as the How to chose between different mechanisms is the game proceeds meaning experience is gained. The task of the question. The answer depends on the objective of the party with less information is to separate out the different government (e.g. social objective or maximising economic types or to work out different responses from each type so welfare). This means the resource (e.g. spectrum) must go to that the objectives may be achieved, knowing that directly the party which values it the most. This is because economic asking the other party will not ensure true and honest welfare is defined as the difference between the ‘willingness to answers. Thus, the critical elements involved are ‘information’, pay’ and the ‘cost to society’. Hence, the resource should go ‘types’ with their preferences, beliefs about types and the to the party which is willing to pay the highest or values the various ‘messages’ that each type would give (i.e. strategies) resource the most. under different game settings. A desirable mechanism is one in which the outcome of Mechanism design, in the strict sense of the term, will the game meets the social objective. The outcome (or have one ‘mechanism designer ’who sets up the game (often outcomes in some cases) is an equilibrium result of the called ‘regulator ’or the ‘institution’) with ‘structures and rules ’ incomplete information game or mechanism, designed and put by which a number of parties play the game. The ‘mechanism in place by the designer. This equilibrium outcome may be a designer ’will have certain goals or objectives but unlike in the dominant strategy equilibrium in the sense that the players examples considered above, she is herself not an actual have a strategy (action) which is clearly more beneficial to ‘player’. The mechanism designer has a menu of them than other strategies (actions). games/mechanisms to choose from, or will go about designing one, if no such mechanism is readily available. In other words, 4. Applicability to developing countries she examines the outcomes of the various ‘games ’and In many developing nations, however, there is a lack of chooses the one (or designs one) which will have outcomes information regarding underlying matters—whether that be the that matches with her objective (i.e. chooses equilibrium prevalence of diseases or accurate measurements of points). While doing so, she will have to tackle the limitations economic welfare and poverty—due to the unavailability of of ‘incomplete information’, ‘types ’of players, prior beliefs, etc. high-quality, comprehensive, and reliable data .This limits the The aim of the whole exercise is to formulate a conceptual implementation of effective policies and interventions. An framework that allows consideration of relevant issues at a emerging solution, has been to take advantage of high phone high degree of generality combining the objective of maximum and Internet penetration rates across developing nations to social welfare which can be hindered by private self-interest design new technologies which enable collection and sharing knowing that participation of private entities is a must for of high-quality data. This is possible through the application of achieving that objective of social welfare. Mechanism Design and Artificial intelligence and has been used in countries like Uganda and Rwanda. 3. Concept of Policy and regulatory design Lack of information also leads to inefficiencies in existing Mechanism design has a very wide variety of systems, presenting a possibility to introduce solutions that applications. For instance, in the case of public goods, the abide by existing cultural and technological constraints. For efficiency criterion requires that a project (e.g. a bridge to instance, large price discrepancies and major arbitrage connect two parts of a town) should be undertaken if the opportunities present in markets for agricultural products in willingness to pay by the beneficiaries is greater than the Uganda suggest large market inefficiencies. To alleviate this, costs to people. This often involves transfer of some Newman et al. [2018] introduced Kudu—a mobile technology resources from public to private hands. The government now that functions over feature phones via SMS service. Kudu has to ensure that public welfare is maximised and at the facilitates transactions between farmers in rural areas and same time it must reduce the costs to the exchequer. But this buyers at markets in cities by allowing sellers and buyers to raises two problems. post their asks and offers. Kudu has been adapted by users

RRIJM 2015, All Rights Reserved 1778 | Page Volume-04, Issue-06,June-2019 RESEARCH REVIEW International Journal of Multidisciplinary across Uganda and many trades have been realised through resource allocation, traffic flows, and health care outcomes. this system ( Abebe & Goldner, 2018) . Algorithmic mechanism design, combined with the wealth of Availability of new technologies also presents data, offers a solution to help optimize those systems. “In opportunities to tackle fundamental problems related to today’s information economy, economic interactions are poverty. Advances in last-mile payment technologies, for happening not between humans but between algorithms that example, enable large-scale, secure cash transfers. interact at the frequency of milliseconds, says Darden GiveDirectly leverages this and the popularity of mobile professor Michael Albert. (Glinska, 2019). India is in a position money across the world to create a system where donors can to profitably use the field of Mechanism Design to address a directly transfer cash to recipients GD, Blattman and Niehaus number developmental issues. She has a young work-force [2014]. GiveDirectly moves the decision about how to use aid that is conversant with latest technological developments, from policy-makers to recipients, giving recipients maximum Artificial Intelligence and Information Technology. Such flexibility. Such aid generates heterogeneity in outcomes — individuals can provide reliable solutions to the numerous e.g., families may use aid to start a business, pay rent, cover allocation and efficiency problems being observed in the health costs, and so on. (Abebe & Goldner, 2018) sphere of public policy. A prominent example is in agriculture, which accounts for Arunava Sen (2007) has pointed out to some such a large portion of the economy in many developing nations. scenarios where mechanism design has potential answers. Here, viral disease attacks on crops is a leading cause of food The sale of spectrum licences for FM radio broadcasting, insecurity and poverty. Traditional disease surveillance bandwidth for internet services, modernisation of airports, etc methods fail to provide adequate information to curtail the provide situations of contradictory interests in terms of welfare impact of diseases The Cassava Adhoc Surveillance Project costing and profits. A fundamental theoretical question which from Makerere University implements crowd-sourcing remains open is the design of expected revenue maximising surveillance using pictures taken by mobile phones in order to auctions in this setting. Important computational issues also address this gap. The tool is set up as a game between arise in the multiple object model. For instance, it is typically farmers and other collaborators, and aims to collect truthful, computationally difficult to determine efficient allocations. Do high-value data (e.g., data from hard-to- reach locations). This procedures exist that are computationally easy but approach underlines interesting challenges, such as how to approximately efficient? optimally incentivize individuals to collect high- quality The potential application of mechanism design theory of information and how to augment this information with existing topical interest in India, is the issue of land acquisition for methods( Abebe & Goldner, 2018). SEZs. Consider a model with N farmers each of whom have Bowles and Hwang (2008) have pointed out that in the exactly one unit of land to sell but whose valuations are light of Behavorial Economics, providing incentives often private information. There is a buyer who has a positive works for public policy. This is particularly true of positive valuation only for all N units of land, i e, only if all farmers sell. incentives to engage in activities for which there is little or no Moreover this valuation is also private information for the pre-existing motivation or ethical obligation, and for negative buyer. What is the “best” trading rule in this situation? An incentives that avoid conveying unfavorable information about obviously desirabale property is efficiency which would require the type or intentions of the individual implementing the sale to take place only if the buyer’s valuation exceeds the incentives. The experimental evidence also suggests that the sum of the farmers ’valuations. Another requirement could be socially beneficial effects of public-spirited motives may be voluntary participation which would ensure that farmers are either enhanced or diminished by policy interventions that are not forced to sell at prices below their valuations. It is possible designed by a naive social planner to more closely align self- that efficiency, voluntary participation and Bayes-Nash regarding incentives with social objectives. Hume’s maxim: are mutually incompatible. In that case Good policies and constitutions are those that support socially what is the secondbest rule, the one which violates these valued ends not only by harnessing selfish preferences, but requirements the “least”? Is there a role for an outside agency also by evoking, cultivating and empowering public-spirited such as the government to set reserve prices, force sale in motives. This will be particularly important where critical some circumstances and redistribute appropriately? information is non-verifiable so that contracts are incomplete All such issues can be resolved through application of and the reach of governmental fiat is limited. The reason is mechanism design. Assessing the success in the that in these cases as Kenneth Arrow (1971):22 put it: “norms implementation of policies is an important process objective of social behaviour, including ethical and moral codes (may) for the government. In addition, evolving the implementation ...compensate for market failures.” These researches favour design in such a way as to obtain the intended social objective the use of interventions in the form of mechanism design for is also important. One complements the other. The former is ameliorating the problems of developing countries. the essence of implementation theory. The latter is the essence of ‘mechanism design’. The approach in both is 5. Applicability to India rendered complicated due to information asymmetry which Mechanism design sits at the intersection of economics, usually exists in all practical situations. The challenge of game theory and artificial intelligence. It takes an engineering mechanism designer is to design policy implementation approach to solving a wide range of problems where there are approaches (e.g. privatisation, allocation of a scarce resource) interactions among individuals, markets and institutions. As in such a way as to evolve methods by which optimum result the world races towards automation, there will be more and or maximum social welfare is achieved. more opportunities to develop systems that could influence not only energy usage but also purchasing decisions,

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6. Conclusion inhibit proposed interventions. All of these issues highlight the Developing countries including India are faced with many need for a multi-stakeholder approach that leverages constraints that delay the process of development in these technological advances, innovative technical solutions, and countries. However, an important and defining characteristic partnerships with individuals and organisations that will be of these countries is the readiness to embrace latest impacted by the solutions. India needs to develop faster and technology and adapt it to meet the domestic requirements. In also to take the fruits of development to its poor and weaker the face of problems such as resource-constrained sections. A pragmatic use of modern technology infusing the environments, low literacy levels, logistics and accessibility latest knowledge in the field of mechanism design, problems, socio-economic norms, difficulty in reaching target implementation theory and artificial intelligence will help India groups such as women or the physically challenged, etc. may achieve its targets.

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