Essays in Development Economics

This dissertation consists of three essays in development economics. The first essay is concerned with competition between two processing mills in the sugarcane market of Pakistan. I develop a two-stage duopsony game where, in the first period, mills fragmentize the market by investing in the procurement logistics and infrastructure to create captive segments in the market. In the second stage, mills take the segmentation given and compete in prices. The model endogenously determines the market fragmentation. In equilibrium, complete segmentation of the market emerges, mills buy cane from mutually exclusive segments of the market. Finally, I show that a binding price floor has no effect on the market segmentation. The second essay is concerned with coordination amongst processing mills. I analyse why sugar mills in Pakistan pay cane farmers by weight instead of sucrose content? I develop a two-stage pricing game. In the first stage, mills choose the price regime: pay by weight or sucrose content. In the second stage, for a given price regime, mills compete in prices. The model suggests that evaporation of moisture increases the effective transportation cost for farmers and hence reduces the competition between mills. Numerical solution to the game generates a coordination game. The fact that mills pay by weight, payoff dominant equilibrium, indicates a collusive behaviour among mills. However, I could not rule out the possibility of historical inertia when parameter values represent the historical conditions of the market. Finally, I suggest a price floor as an equilibrium switching policy. The final essay of this dissertation is concerned with cooperation between rural households. I study informal risk sharing contracts when players’ behaviour is motivated not only by their material payoff but also by intrinsic motivations. My results suggest that emotions such as envy, altruism, and intentions work in different directions. Envy and altruism not only reduce the critical discount factor that can self-sustain risk sharing but also make the sharing mechanism more equitable by reducing the number of equilibria in the repeated game. Finally, I study intention based preferences in an infinity repeated psychological game. The main result of the final chapter shows that intrinsic reciprocity based on expectations and intentions can reduce the level of informal insurance by increasing the critical discount factor.