Catalyst | Arranging a market for lemons

My fellow blogger Karthik Shashidhar (and his wife Priyanka Bharadwaj) started an interesting conversation on his personal blog on the grand old market in India: arranged marriage. They assert that the arranged marriage market has become increasingly illiquid, and hence unattractive.

Both Priyanka and Karthik raise an important point that can look obvious in hindsight – that as people exit the arranged marriage market in India, the market becomes smaller, more “illiquid”, and as people are unable to find suitable partners there – they continue to exit. Almost all markets have positive network effects too – the more the number of “buyers” and “sellers”, the healthier a market usually is. However, in a society divided by caste, class and religion, marriage markets were always small and illiquid, and it requires greater evidence to establish that arranged marriage markets today are necessarily less liquid than markets of previous generations.

Marriage is a curious contract that is both a labour union and a union of capital, which usually ends up creating a larger labour pool over time. ‘Arranging’ the marriages of suitable men and women has been the done thing for centuries if not millennia among large numbers of people. Finding a spouse involves heavy search costs no matter how you go about it and failed relationships constitute a significant sunk cost too. (Though apparently, people can learn from their failures. As Douglas Adams said it, “You live and you learn. At any rate, you live.”) There’s also significant information asymmetry involved – marriage is a serious affair after all, and you need to know a good amount of details any potential spouse before entering into such a contract. Further, in large families, it wasn’t just two individuals who got married, but two households.

“Arrangements” were an ideal solution to the marriage market, and it can be argued that arranged marriages provided better outcomes. Extended families and networks solved the search cost challenge, and the same networks could also solve the information asymmetry challenge – of whether the spouses were well off, were from “good families” and more.

I would argue that in the marriage market in India today, two things have happened: one, that the nature of information asymmetry has significantly changed; and two, that the arranged marriage market has become a market for lemons.

The nature of information asymmetry has changed because people look for different things in spouses – for shared interests, temperaments, greater personal compatibility and more. While financial and familial backgrounds may still matter, the asymmetry in that information is usually more readily solved. Traditional arranged marriage market mechanisms and networks fail to provide symmetry in the new kinds of information, and this makes the arranged market start failing. Also, this is happening in parallel with dating and other competing mechanisms that are making new marriage markets.

So this means that a “good” partner is unable to differentiate themselves from a “bad” partner in an arranged marriage market – and the lack of differentiation results in an overall devaluation of the “goodness” of a partner or a match. As the more high-value partners and people start moving out of the arranged marriage market to others, you are increasingly left with people who continue in the arranged marriage market because of poor choice – with them being adversely selected. Thus arranged marriage markets can become markets for lemons.

This is not to say that it’s impossible to have a happy arranged marriage these days. Nor is it inconceivable that both technology and society can evolve new ways of disrupting markets for lemons. The classic lemon market, that of second-hand cars in the US, is now a thriving one where information asymmetry is a thing of the past.

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.