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

In developing economies firm strategy is directed more often at governments than at other competing firms. As an initial step towards modeling such interactions, this paper considers a situation where government confronts a monopoly. The latter chooses price and maximizes profit, and the former chooses a tax rate and maximizes tax revenue. We allow government and the monopoly to 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 an industrial setting is likely to exhibit greater inefficiencies than that which arises in standard models