DEMONETIZATION:DID INDIA FACE THE ST. PETERSBURG PARADOX AND LOSE?

Journal of Governance and Regulation

Rajaram Gana¹ 

关键词: St. Petersburg Paradox;    India;    Demonetization;    Black Money;    Corruption;    Law-abiding Citizen;    State Collusion;    Rationality;   

DOI  :  10.22495/jgr_v6_i4_p3

学科分类：社会科学、人文和艺术（综合）

来源: Virtus Interpress

【 摘 要 】

In 2016, India demonetized 24% of its currency notes (viz. 86% in cash value) in circulation presuming this will remove “black” (illicit) and counterfeit cash holdings, and combat money laundering. This was the largest demonetization experiment in recent history. Although demonetization has occurred several times before, no unambiguous economic argument for, or against, it exists. This was a key enabler for demonetization, yet again. This paper argues that the St. Petersburg Paradox (SPP) provides a compelling argument against demonetization. Assuming the distribution of cash is lognormal, it is shown that the probability of black cash holdings will be small. If not, the holders would: a) be irrational because they are willing to accept, contrary to the SPP, the small probability of a large loss, by effectively perceiving it as zero, without using all means to immunize themselves against it; or b) be sure their cash can be legitimized via collusion with the State; or c) be sure they can incentivize law-abiding citizens to act as agents to legitimize the cash for a reasonable fee. Assuming rationality and no bureaucratic support, large probabilities of black cash holdings imply that many more law-abiding patriotic citizens have to be corruptible than seems rational.

【 授权许可】

CC BY-NC