Developing Country Studies ISSN 2224-607X (Paper) ISSN 2225-0565 (Online) Vol 2, No.1, 2012
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This paper provides a theoretical foundation to the behaviour of big retailers. It shows how big retailers decide on the on the amount of hoarding on the basis of their future price expectation. It further shows that agents do not voluntarily destroy any part of output with the hope of reaping higher revenue in the future, when they see that the present price has increased. Since food inflation has become a major problem in India during the past three years, it is high time that the government takes some concrete short-term as well as long-term steps to put the reins on soaring prices. This paper spells out some plausible short-run steps that the government can take, without imposing must fiscal costs. The contribution of this paper is primarily on the stabilizing effects of price intervention and output intervention by the government. Government intervention not only affects directly the open-market price in this model, but also indirectly affects the future expectations of prices formed by traders. A clear-cut policy will carry the signal the traders about the possible direction of government intervention in the event of a supply shock, and thus would insulate the price of output from the destabilizing speculation of the agents. When the agents know that the government intervention will moderate the extent of the shock, their expectation of a serious price rise will also be moderated. As a result, the food inflation will be purely due to the extent of shock and not due to wrong hoarding actions of the middlemen. This is essentially how the government can control the behaviour of the middlemen References Basu, K., (2011), “India’s Foodgrain Policy: An Economic Theory Perspective”, EPW , January 29, 2011, Vol XLVI, No 5. Chand, R., Ashok Gulati, P. Shinoj Kavery Ganguly, (2011), “Managing Food Inflation in India: Reforms and Policy Options”, NCAP Policy Brief. Chavas. J. P., (1999), “On the Economic Rationality of Market Participants: The Case of Expectations in the U.S. Pork Market”, Journal of Agricultural and Resource Economics 24(1): 19-37. Gillespie. J., and Alvin Schupp, (2002), “The Role of Speculation and Information in the Early Evolution of the United States Ostrich Industry: An Industry Case Study”, Review of Agricultural Economics, Vol. 24, No. 1 (Spring - Summer, 2002), pp. 278-292. Holt. M. T. and Andrew M. McKenzie, (2003), “Quasi-Rational and Ex Ante Price Expectations in Commodity Supply Models: An Empirical Analysis of the US Broiler Market”, Journal of Applied Econometrics, Vol. 18, No. 4 (Jul. - Aug., 2003), pp. 407-426. Vimani. A, and P.V. Rajeev, (2001), “Excess Food Stocks, PDS and Procurement Policy”, Planning Commission Working Paper No5/2002-PC
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