Development under Imperfect Markets

The increased availability of householdlevel datasets from the developingnations has generated interest in the economicsof the household in developingcountries. The theoretical literature in thisarea has witnessed a remarkable explosionin the last two decades, drawing on advancesin game theory and the economicsof information. The major contribution inthis literature tries to explain the reasonfor the presence of distinctive institutionalcharacteristics of the informal sector in thedeveloping nations as documented by theempirical economists. The distinctive institutionalcharacteristics of the informalsector includes fragmented labour andcredit markets, coexistence of diversecontractual forms, unequal treatment ofobservationally similar economic agents,interlinked transactions, importance ofcollateral to obtain credit and importanceof informal cooperatives and kinshipnetworks. The book by Bardhan and Udryis a step towards this direction extendingthe field beyond Walrasian general equilibriumparadigm to incorporate suchfeatures as informational asymmetries,network externalities, and various types ofcoordination failures.

Chapter 2 of the book presents a formalmodel of the household economy – theagricultural household model – that analysesthe joint production and consumptiondecisions of such a household. This isparticularly relevant for a developingcountry because a significant proportionof the population uses their own labourand capital to earn income and a portionof the earned income is used for consumptionpurposes. The basic agricultural householdmodel is extended in chapter 3 toinclude the bound placed on them bysocietal norms, in particular to examinethe interconnections of fertility decisionsof different families giving rise to multiplefertility equilibria.