2013-04-27

In Memory of Prof. Hayami

I found an interesting article (through this tweet by Prof. Sawada) about Prof. Yujiro HAYAMI, a leading agricultural/development economist who passed away last December:
"Death of a layman's economist" (by Prof. Abdul Bayes at Financial Express)

The article says:
Leaving aside for a moment his hundreds of technical articles published in reputed international journals, I shall take the privilege of citing from his famous book on development economics that I have mentioned before. Using the concept of Prisoner's Dilemma - when two persons convicted of a murder are kept in separate cells without one knowing what the other person is saying to the investigating officer - he illustrates how much loss the inability among people to establish cooperative relationship due to lack of communication and trust could generate for the society. This loss can happen in all economic transactions. "For example, in the transaction of a commodity, a buyer may try to reduce payment to a seller on the false charge of quality deficiency in delivered commodities. Then, the seller will deliver low-quality commodities thereafter. As their mutual distrust is heightened, they will stop transactions and thereby close off a mutually profitable business opportunity".
Prof. Hayami's famous book mentioned above is the following.
It is very interesting to know that Hayami has applied game theoretical ideas to his work on developmental studies. I should have tried to talk with him (Actually, Prof. Hayami was my colleague in GRIPS...)

Hayami cites another example regarding the costs of non-cooperation: "If employment is so insecure that employees may be discharged any moment, they would make little effort to acquire specific knowledge and skill for efficient work in his organisation. Their employer would then be inclined to discharge these employees for their lack of effort. In this way, cooperative relationship will not be established with the little accumulation of skill and knowledge needed for efficient functioning of this organisation". 
According to Hayami hypothesis, if mutual trust between particular individuals is thus elevated to a moral code in the society, huge savings would be made in transaction costs. If such cooperative negotiations could be guaranteed, business plans could be promoted ex-post much more flexibly and efficiently than by rigid ex-ante specification of contingencies, especially in long-term transactions subject to high risk and uncertainty. By and large, trust is a social capital that needs to be nurtured, if necessary, by structuring the cooperative relations into a hierarchical organisation. If mutual trust between workers and management ceases to work, the cost of monitoring and enforcing the contract would be large.
(made bold by yyasuda)

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