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Strategic default

LiveMint logoLiveMint 24-04-2017 Livemint

Farmers in Maharashtra have begun to default on their farm loans in anticipation of a waiver on the lines of what has happened in Uttar Pradesh. Such strategic defaults are a rational response. The more periodic farm loan waivers become part of the Indian political playbook, the more will credit culture deteriorate.

Behavioural economists have done a lot to tell us how human beings have cognitive biases as well as how we use heuristics to make decisions. They have raised important questions about economic rationality. The churn in economics after the global financial crisis has led to further doubts about the assumptions of rational expectations. These are welcome developments. The problem is that the pendulum swings too far to the other side during these debates. There are limits to economic rationality, but this does not mean that rational calculations about the future do not matter at all.

The wave of strategic defaults by farmers in Maharashtra should be seen as a timely reminder that people make strategic calculations—a useful lesson for economists as well as our policymakers.

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