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The Unsupportable Support Price: The Government in Paddy Auctions of Northern India

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Author Info
J.V. Meenakshi (Delhi School of Economics)
A. Banerji (Delhi School of Economics)
Abstract

In most developing countries, there is an active debate on the changing role of the government in mediating market outcomes. In grain markets in India, this debate assumes a renewed significance, given the excessive accumulation of food stocks in recent years. For example, the wisdom of maintaining a 'high' Minimum Support Price has been called to question. Auction theory provides a powerful and hitherto unused tool not only for analysing the structure of grain markets and the process of price formation, but also for analysing implications of alternative government policies. Our results for a small, regulated market for parmal paddy in Northern India, where grain sales occur through the open ascending auction, suggest that (a) the government's inability to support the minimum price in the market has less to do with the poor quality of grain offered for sale, and more to do with a reluctance to accumulate stocks. (b) a lower but credibly-enforced minimum support price will not have the desired effect on government purchases. (c) a lowering of the percentage that millers are required to sell as levy to the government is consistent with a credible support price and effective management of stocks.

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Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 94.

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Length: 23 pages
Date of creation: Jul 2001
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Handle: RePEc:cde:cdewps:94

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Find related papers by JEL classification:
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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  1. Laffont, Jean-Jacques & Ossard, Herve & Vuong, Quang, 1995. "Econometrics of First-Price Auctions," Econometrica, Econometric Society, vol. 63(4), pages 953-80, July. [Downloadable!] (restricted)
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  2. Hendricks, Kenneth & Porter, Robert H, 1988. "An Empirical Study of an Auction with Asymmetric Information," American Economic Review, American Economic Association, vol. 78(5), pages 865-83, December. [Downloadable!] (restricted)
  3. Laffont, J.J., 1996. "Game Theory and Empirical Economics: The Case of Auction Data," Papers 95.394, Toulouse - GREMAQ.
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  4. Robert H. Porter & J. Douglas Zona, 1999. "Ohio School Milk Markets: An Analysis of Bidding," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 263-288, Summer. [Downloadable!] (restricted)
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  5. Nelson, Jon P., 1995. "Market structure and incomplete information: Price formation in a real-world repeated English auction," Journal of Economic Behavior & Organization, Elsevier, vol. 27(3), pages 421-437, August. [Downloadable!] (restricted)
  6. Sukhatme, Vasant A & Abler, David G, 1997. "Economists and Food Price Policy Distortions: The Case of India," Economic Development and Cultural Change, University of Chicago Press, vol. 46(1), pages 79-96, October.
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