How much black money overseas?

The Hindu reported yesterday that our Prime Minister Dr. Manmohan Singh will ensure the return of black money deposited in foreign banks. Click here to read the news. The news says, "While no official data is available on the quantum of slush funds, it is estimated that such black money stashed away by Indian nationals in tax havens overseas could be worth nearly $140 billion."

That amounts to approximately 10% of our GDP.

Moral Hazard and Adverse Selection

Economists refer to this term 'Moral Hazard' as someone's behaviour is not observed, then it affects the probability or magnitude of the payments. For example, if your car is fully insured, then you are less likely to be careful while driving. Or if you house is fully insured against theft, you will be less diligent about locking doors or installing an alarm system.

Adverse Selection is a form of information asymmetry. For example, in used car market, the seller of the car knows much more information than the buyer. When making a purchase, buyers view all cars as 'medium quality', in the sense that there is an equal chance of getting a high-quality or low-quality car. Because of such asymmetric information problem, low-quality goods drive high-quality goods out of the market. This phenomenon is sometimes referred to as the lemons problem. Another example is, how insurance companies sell premium. They hope that there are more healthier people taking policies than less healthy people so that the costs are averaged for Insurance companies and they can make some money too.