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Economics creates value

What governs a firm’s behaviour, what do its clients expect?

education Updated: Jul 14, 2009 17:23 IST
Pranab Ghosh

Prof Steven Tadelis, an associate professor of Business and Public Policy, Haas School of Business, USA, devotes most of his time to research, advising PhD students and teaching at the MBA and PhD levels. He was in India
recently to deliver lecture at IIPM, Delhi.

India’s prospects as a major outsourcing centre?
India has two advantages compared to other developing countries with relatively low labour costs: First, it has an extremely large number of educated people who are trained by first-rate universities. Second, these educated people have a great command of English. This combination has resulted in many US firms outsourcing a variety of high tech services, even R&D, to India. I have not had the pleasure of visiting Hyderabad or Bangalore, but I understand that much of what I describe is happening there. This is becoming a true core competence of India, and well worth nurturing further.

What is the exact meaning of economics of reputation?
The study of what value lies behind a firm’s reputation and how it affects the behaviour of firms is something I studied in my doctoral dissertation at Harvard, and continued to study for some years after that. In a nutshell, the ‘economics of reputation’ studies the situations in which it is rational for customers to use past performance as an indicator of future performance, and how the future behaviour of customers will discipline the behaviour of firms to provide high quality goods and services, even when this quality is not readily observed by its clients.

What are the prospects like for an Indian student studying economics — in India as well as abroad?
In the US there seems to be a trend in the past decade or so of more undergraduates majoring in economics. The study of economics is largely about how to allocate scarce resources in order to create more value through production and consumption decisions, and what kinds of incentives encourage individuals to create value. As such, anyone who plans to hold any kind of leadership role in for-profit, not-for-profit, or public institutions must have some grasp of economics. I think that pursuing a degree in economics at a respectable university, be it in India or abroad, will prove to be very useful. That said, I hope that some people continue to focus on engineering, sciences and other disciplines since an economist can help others see ways to create more value, but others are needed for the creation process itself!

Your advice be to a student who wants to pursue higher studies in economics in the US?
For PhD students there are three important components for a strong application. First, the student must have a very high grade point average (GPA), preferably from a respectable institution. Second, the student should obtain a perfect or close to perfect score in the GRE math exam. Last but not the least, very strong letters of recommendation are needed, and these carry the most weight if they are from professors who are recognised worldwide by their publications.

Any prominent economists of Indian origin working in the US you might like to mention?
There are many truly great economists of Indian origin who teach in the very best universities. They include Avinash Dixit from Princeton, Jagdish Bhagwati from Columbia, Pranab Bardhan from Berkeley, Partha Dasgupta from Cambridge (UK) and T. N. Srinivasan from Yale to name just a few. A younger cohort includes Abhijit Banerjee from MIT, Debraj Ray from NYU, Raghuram Rajan from the University of Chicago and many more.
Prof Tadelis spoke to Pranab Ghosh