Everyone is wondering why the finance minister has decided to transfer the spending of about Rs 2 lakh crore of centrally sponsored schemes to the states. Until now the central ministries had a very large say in it because they were, well, centrally sponsored schemes.
This gave them as well as the Planning Commission a big stick to beat the states with. That stick has now been taken away.
There have been two explanations for this. One is that Mr Chidambaram has finally done the right thing for increasing the fiscal autonomy of the states. The other, more cynical, explanation is that this will stymie the Narendra Modi led BJP when it wants to distribute largesse amongst likely coalition partners because there will be nothing left in the kitty.
Since everything in life is about strategies, it is useful to see how the game theorists amongst economists would explain the UPA’s decision. Fortunately, one doesn’t have to look far because there are two ‘games’ that capture the essence of the UPA’s sstragegy.
One is called the ‘Dictator’ Game. The other is called the ‘Ultimatum’ Game developed by the Nobel winning Daniel Kahnemann.
The Dictator Game says there is something to be divided between a proposer of the division and its receiver. The proposer’s division is final and the receiver must take what he gets, no argument, no counter proposal.
This is in fact pretty much the norm. When did you last see a beggar or a waiter or your own son, throw back the coins at you?
The game PC has played
The question arises: in such a circumstance, why would a rational proposer give anything at all to the receiver who has no power to do anything? A little reflection will show that this is exactly like our Centre-state relations.
The Ultimatum Game is slightly different in that if the receiver rejects the proposed division, even the proposer gets nothing. The question here is why do receivers prefer to get nothing over at least something.
Economists have offered many explanations, some more appealing intuitively than the rest. The most widely accepted explanation for this seemingly irrational behaviour is that a reputation for generosity matters a lot to most people.
Most explanations tend to centre around notions of fairness, equity and justice. Research has shown that Mongolians are more likely to offer equal divisions than anyone else.
So far no political explanation has been offered but Mr Chidambaram may well have shown the way to economists to examine meanness as a strategy. He may well be telling those who try to form the next government that they will have no inducements to offer.
The counter-argument is that while this may seem like a great strategy right now because Congress does not expect to form the next government, the numbers could combine in such a way in May that it once again does so.