Intangible benefits of NREGP

The flagship program of UPA government that guarantees a minimum of 100 days of guaranteed employment to the unemployed in India especially in rural and semi urban cities has been a huge success. This is one scheme that clicked the right cord with the rural poor and instantly turned into votes for the Congress led UPA in the last elections. The scheme exceeded all the tangible benefits estimated or expected from it. Rural poor have a guaranteed employment scheme they can bank on that provides them a source of livelihood even if they are fired from their farm job or the crop on their tiny land holding fails. But it’s the intangible benefits which were unintended and untargeted initially that has made this scheme a huge success or at least a success which can serve as a launch pad for future rural development schemes.

NREGP helps control population growth among the rural and semi urban poor. No, it does not provide funds to laminate your libido or make you pop pills; it just raises the opportunity cost of having a child. A lady has to forgo her wage for at least a year if she bears a child. That translates into an opportunity cost of around Rs.40000 for the entire year she ‘wastes’ in childbirth and the costs associated with it. The men will rather prefer their ladies to have fewer children. A minimum standard wage also ensures incremental wages for them when they are employment in other sectors. In fact farm owners in Punjab had difficult time employing farm labor at rates close to those provided under the NREGP for sowing the kharif crop. They had to pay more than the minimum wage to attract farm labor. No doubt the NREGP wage rate is acting as a floor and incremental wages in other sectors brings a hope of better incomes and resulting subsistence livelihoods for the poorest of poor. As the opportunity cost of their time goes up, less time is wasted in activities like child birth and maternal leaves for the mother. On the flip side providing a subsistence wage may mean increased diversion of poor towards the only entertainment activity they relish or have access to. Education and awareness can play an important part in spinning a web of education, employment and population control among the poor. The development efforts at the base level should target these intangibles apart from the tangible benefits. Well done Team Manmohan in your batting power play (with the initial launch and success if NREGP), with wickets in hand (time to go before next election), lets hope you keep up the scoring rate in the middle overs and go for the slog in the final over. We seem to have an exciting match on our hands.

Congratulation President Obama !

Dear President Obama

Many congratulations for the Noble Peace Prize. Indeed this couldn't have come at a better time. The Noble Prize reaffirms the American Pledge and your 'Hope' of a better and secured world for all future generations. Your extraordinary efforts to strengthen international diplomacy and cooperation between people has given the world a new hope of a better and secured future. Your carefully crafted and well delivered speeches on Nuclear Disarmament and Climate Change have acted like a catylst for initiating a process of change. Many congratulations once again to you, Michelle, kids, dogggie and all Americans who are the fore bearers of your slogan of change, hope and peace. .

Some of the things that have spoken about (or thought in your mind) have helped create a better and peaceful world. The decision to close down Guantanamo Bay detention center, lending a hand of dialogue and talks to Iran and North Korea, troop withdraw from Iraq (and focused approach in AfPak), encouraging talks between Palestine and Israel and a respectful approach towards erstwhile cold war enemies makes the world a peaceful and relaxed place for all the citizens of the world. Acknowledging the difficulties faced in difficult and complex issues like climate change and nuclear disarmament, yet resolving to move towards a peaceful resolution makes you not only a better (and popular) President but also a better citizen and world leader.
Under your leadership we expect to see America restored to its old glory with a less hawkish attitude. We also expect you to carry on with your resolve to make America and the world a better and safer place for future generations. Much needs to be done to pay for the gratitude and confidence the world has bestowed upon you by blessing you in advance with a Noble to motivate you to accomplish your unfinished agenda.

We expect the world from you
With Warm Regards

Citizens of this world

Travel Agency Market and the “Lemons Problem”

Travel Agency Market and the “Lemons Problem”

If you bought a second hand car recently (well, that’s what most of us can afford in recessionary times) chances are that you have bought yourself a ‘lemon’. Noble Laurette George Akerlof discusses information asymmetry or the “Lemons Problem” in his paper titled "The Market for Lemons: Quality Uncertainty and the Market Mechanism" which discusses a market situation in which seller is more informed about the product than the buyer. He states this with the help of used cars market example. There are good used cars and defective used cars ("lemons"), but because of asymmetric information about the car (the seller knows much more about the problems of the car than the buyer), the buyer of a car does not know beforehand whether it is a good car or a lemon. So the buyer's best guess for a given car is that the car is of average quality; accordingly, he/she will be willing to pay for it only the price of a car of known average quality. This means that the owner of a good used car will be unable to get a high enough price to make selling that car worthwhile. Therefore, owners of good cars will not place their cars on the used car market. This is sometimes summarized as "the bad driving out the good" in the market.

"Lemon’s market" effects have also been noted in other markets, such as used computers and the online dating "market". More recently we are noticing the symptoms in our local travel agency market (travel trade, you may call it), particularly among the un-branded, un affiliated, off line travel agencies. Much like the used cars market (where the features of a used car, good or bad are better known to the seller than to the buyer), travel agency market has got informational asymmetry of the service standards provided by different travel agencies particularly in terms of reliability, level of expertise and experience. An average consumer places all un-branded, un-affiliated, off line travel agencies in the same bracket and the only factor influencing his purchase decision (apart from price) is his personal rapport or relationship with the particular agency. There is some form of a perfect competition in the B2C segment of the travel agency market where the individual sellers are price takers selling similar products (airline seats/ hotel rooms) at the same price range . Consumers are indifferent in the choice of their travel agent (keeping personal rapports and relationships constant) as the product is standardized (everyone is fighting to sell the same airline seat/ same hotel rooms) and there is no scope for abnormal profit (or scope for generating alpha as investment bankers like to call it).

This is an interesting situation of a market being in a state of perfect competition (keeping seller-buyer personal rapport & relationships aside) with signs of a ‘lemon’s problem’. The service standards differ among agencies especially in terms of their past experience, network strength, staff expertise and reliability but the same is hardly distinguishable in the eyes of the consumers when making a purchase decision or at least approaching an agency for a purchase. The consumer is likely to select a ‘lemon’ than a good agency on the basis of his perception of buying standardized product or service (similar airline seat/ hotel room) from an agency providing average quality of service. This is disadvantageous for the agencies with high service standards as the customer’s perception of average quality places them among the ‘lemons’. The agency with high service quality standards or innovative and differentiated service delivery mechanisms is unable to charge a premium price and thus looses the motivation to differentiate or innovate or improve its service and quality standards. “The bad start restricts or drives out the good from the market”.

How should the industry regulators and trade bodies react to the ‘lemons problem’? Well its time for some introspection for regulators like IATA and local trade bodies like TAAI and TAFI to reduce informational asymmetry and provide signals to the consumers on the level of service provided by its affiliate agencies. There ought to be a grading system to differentiate among excellent, average and poor service providers. It could be left to the option and discretion of the agencies to get them graded; obviously high quality service providers would like to get graded and flaunt their high service quality standards to the consumers. However the ‘nimboodas’ (lemons) would just rubbish this as just another theoretical procedure and may lobby against it. Since most of the regulators/ trade body leaders are from the industry or will in some way seek employment in the industry after the completion of their tenure as regulators/ trade body leaders they may be biased in favor of regulations/ procedures that support the personal interests of the lobbyists (who would most likely be lemons) against any such grading procedure. This no doubts hurt the industry players who have toiled hard to structure sound systems and practices and build successful business models based on high service and quality standards. To be perceived among the lemons is reason enough for them to loose foresight and motivation to innovate/ differentiate. It just sounds like a brilliant student being given the same marks in an exam as a poor student even though the brilliant student worked hard and performs better than the poor student. The brilliant student will just not have it in him the next time. The phenomenon also contradicts the self fueled mechanism of a capitalist economy proposed by Keynes. In the final chapter of his ‘General Theory’, Keynes foresaw ‘capitalist socialist investment growth mechanism’ to be fueled by the ‘animal spirits’ of entrepreneurs and the constancy of investors, B2c, who must commit their funds to uncertain ventures for extended periods and thereby innovate and differentiate in their pursuit of abnormal gains. Maybe Keynes underestimated the problem of ‘lemons’ in his predictions that drives out innovators from the market.