The Babu and Boxwallah: Managerial Incentives and Government Intervention in a Developing Economy.

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. Copyright 1997 by Blackwell Publishing Ltd