22.42 ndian onom
not considered as borrowers by the banks, simply of acquiring an asset), replacement cost adjusts the
because they live in that area. effects of inflation.
rent resiDuAl risk
It has two different meanings in economics: What is left after one takes out all the other shared
(i) The first is layman i.e. the income accruing risk exposures to an asset, also known as alpha (a).
from hiring land or other durable goods. When one buys an asset one is exposed to
(ii) The second (also known as economic a number of risks, many of them not unique to
rent) is a measure of market power i.e. the asset but reflect broader possibilities (such
the difference between what a factor of as the future behaviour of stock market, interest
production is paid and how much it rate, inflation or even government policies,
would need to be paid to remain in its etc.). Exposure to this risk can be reduced by
current use. diversification.
For example, a cricket player may be paid Rs.
40,000 a week to play for his team when he would retAil bAnking
be willing to turn out for only Rs. 10,000, so his A way of doing banking business where the
economic rent will be Rs. 30,000 a week. banks emphasise the individual-based lending
rather than corporate lending–also known as
rent-seeking high street banking. Such banking focusses on
Spending time and money not on the production consumer loans, personal loans, hire-purchase,
of real goods and services, but rather on trying to etc., considered more cumbersome and risky.
get the government to change the rules so as to
make one’s business more profitable. retrocession
It is like cutting a bigger slice of the cake rather The term has got three different meanings in which
than making the cake bigger trying to make more it is used—
money without producing more for customers. (i) The purchase of ‘reinsurance’ by a
The term was coined by the economist Gordon ‘reinsurance company’ (as in the case of
Tullock. India, the GIC going for ‘reinsurance’
on the ‘reinsurance’ it has provided to
rent-seeking behAviour other ‘insurance companies’ operating
in India). This limits the risk that a
The behaviour which improves the welfare of
reinsurance company may face, since it
someone at the expense of someone else. A
has purchased insurance against an ‘event’
protection racket is the most extreme example of
that might affect a company that it had
it, in which one group (i.e., the protected one)
underwritten (reinsured). If a reinsurance
betters itself without creating welfare-enhancing
company continues to purchase insurance
output at all.
it might ‘unknowingly’ buy back its own
risk, which is known as ‘spiraling’.
(ii) The ‘voluntary’ act of returning ceded
The cost of replacing an asset (such as machinery, property by one to another which may
etc.). Opposite to historic cost (i.e., the original cost be a result of ‘request’ to have property