Anticipating the Unintended #51: Unka Ek Sawaal, Hamare Do-Do Jawaab

This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

“If everyone starts a newsletter, who will read them?”

This is the message I got on Monday morning from a reader. It initially seemed like a variant of the counter to Bill Gates’ idea of raising chickens to end poverty — “if everyone starts raising chickens, who will buy the chickens or the eggs?”.

I don’t like to begin a week with existential questions. My default position about newsletters has been more, the merrier. But that’s partial equilibrium thinking. What if everyone starts one?

“But aren’t we writing relevant stuff. People will read us,” I replied.

“Hah! What have you written for aam aadmi? Where’s the public in your public policy?”, came the response.

That touched a nerve.

So, we trawled through the thousands of emails we get every week to find the questions that are exercising the minds of the janata janardhan. We found a few ‘burning’ questions. Like we often do, we turned to our parampujya guru, Prof. Arthananda Ilyich Smith-Hayek (AISH) for the answers. He was happy to share his wisdom.

Q1. Dear Prof, I was saddened by the passing away of a talented young actor recently. Nepotism killed him. I decided to not have anything to do with any movie, business or party that supports nepotism. But this has meant I can’t do anything in India. Turns out everything in India runs on nepotism. Should I just quit and become a hermit? My father has a small patch of forest I can use.

                                                                                                                Your etc

                                                                                                                Putramoh Parivaarwadia

Prof. AISH: Good question. Many years ago, a journalist asked Devi Lal, who was then the Deputy PM, on why he was promoting his son within the Janata Dal.

Devi Lal replied: “Who else should I promote? Your son?”

Nepotism is a natural state of being among humans. We love our children, relatives or friends. We derive great joy in their success. It is a powerful incentive. We are wired for nepotism. Unless the cost of nepotism is higher than this wiring.

Let’s model this a bit to understand this better.

  • Principal Or Agent? There’s a person who is looking to hire for a role. We will call him Salman Johar (Ganga Jamuni tehzeeb and all). He can either be the proprietor of the business or its manager who works for a salary. In economics, we say Johar is either the principal or the agent. The principal has a strong incentive to hire a competent person for a job while the agent might be indifferent if his salary isn’t linked to the performance of the person hired. This is the standard assumption.
  • Relationship Between Performance and Competence: Let’s label the job as ‘J’ and set the salary for it at Rs. 10 Lakhs per annum. The job J can be of two types. Type J1 is where the success in the job can be directly attributed to the skills of the person doing the job. There’s no place to hide if you lack skills. Type J2 is where the success in the job is a bit random. The skill of the person doing the job is relevant but so are the skills of the team involved, the preferences of the customers that changes over time and luck.
  • Value Differential Among Candidates: There are two candidates to choose from. Sampath who has the right skills and Champath who is underqualified. Sampath can easily get a job with a salary of Rs. 8 Lakhs p.a. in the market because of his competence while Champath can only manage a job paying Rs. 4 Lakh p.a. So, both are pushing the boundaries of their market rates for this job. But there’s greater incentive for Champath because his value differential (Rs. 6 Lakhs) is higher than of Sampath (Rs. 2 Lakhs).
  • Input Costs: There is an effort and costs involved in putting the best case to get the job. Both Sampath and Champath will make it. These could include getting their network to work to influence Johar, padding up their capabilities or even thinking of bribing Johar.
  • Nature of Contract: The nature of the contract between Johar and the candidates could be of two types. It could either be a one-time permanent contract or a temporary contract that gets repeated based on available work.

Based on these, we can look at typical hiring scenarios in India and understand the incentives at play to support nepotism.

Public Sector Hiring: Here Salman Johar is the agent while the taxpayers are the principals. Johar has a fixed salary and his performance isn’t linked to it in a meaningful way. He gets his salary regardless of his performance. Suppose the job for which he was to hire a candidate is of J2 type where the skills of the person and the performance on the job aren’t strongly correlated. These 2 factors provide incentives for nepotism to Johar. If the job is of J1 type, Johar will still be indifferent to hiring a competent candidate because his performance isn’t linked to his salary.

Among the candidates, Champath has a stronger incentive to abet nepotism because of the value differential. He understands the incentives of Johar. He is also aware this is a one-time game which makes it easier for a one-off ‘wrong’ decision. So, he will use his value differential to bribe Johar. Sampath also understands this but has lower value differential than Champath. He will try and use his network to influence Johar. This is not to say there will always be nepotism. But the incentive structure suggests a high probability.

Private Sector Hiring: Salman Johar is an agent and the principal is either a promoter or shareholders who are represented by a Board. Johar’s performance is linked to his salary in a meaningful way in most cases. There is an evaluation of his job done. The job for hire might be of J2 type but there is a performance review mechanism there too. It will reveal the competence of the candidate who has been hired.

Both Johar and the candidates understand this. They don’t go for more direct ways of nepotism. This is where other means like the school, college or community networks are used to influence Johar. If the competence of the two candidates is in the same ballpark, the network effect will tilt the scale. There can be nepotism, but it will be limited.

Family Business Hiring: Johar is the principal who is hiring. He has the maximum incentive to hire the most qualified candidate for the job. However, if one of the candidates is related to him, his incentives change. He will have to weigh competence with the benefit of having his relative get the job. This makes Johar balance competence and nepotism across many roles.

For decision-making roles where the competence can be supported by other experts in the organisation, he would choose a relative. This gives him the safety and the joy of having a child or close relative take on a role. The roles that require skills to perform well, he might go for the more competent candidate. That apart, a lot of family-run businesses (law firms, medical clinics, shops and small businesses) depend on an existing network of customers and partners for business. In these cases, the principal would pass on these relationships to his children to continue running the firm rather than had them over to a professional manager.

Hiring for Films (or Political Parties): Johar is the principal and he must look for the most competent candidate. But the job could be of two types. The technical roles in cinema or political parties are J1 type where the performance is linked to skills and can’t be hidden. But the acting or public-facing roles are J2 type. In cinema or politics, no one has a clear understanding of who or what clicks with the audience. The best actor or the most competent politician doesn’t find acceptance while mediocre players turn superstars or win elections.

Also, a candidate who is from a film or political family has an old network which works for him and also a name that provides instant recognition for the consumers. This is useful to Johar who is hiring for a business where success is fickle. Lastly, this isn’t a one-time permanent contract. This is a game that is played many times over. The roles could reverse too in future. Johar himself may be a candidate in future while the candidate could be the one doing the hiring. Or their children. The entire structure is designed to support nepotism.

Like I mentioned earlier, human beings are wired for nepotism. The institutional checks and balances and the incentive structure are designed to curb this instinct. In places where these structures or incentives are weak, nepotism will thrive. So, it shouldn’t surprise you if those who rail against nepotism today, fall victim to it when they are in decision making roles.

Read the full edition here.

Disclaimer: Views expressed on Anticipating the Unintended are those of the authors’ and do not represent Takshashila Institution’s recommendations.