#51 Unka Ek Sawaal, Hamare Do-Do Jawaab
Economics of nepotism, tuition fees for online classes and the moral imperative of poverty reduction
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.
Q2. Dear Prof, many schools and colleges have decided to move their entire session online for next year. But they are keen on charging the same tuition fees as before. Shouldn’t they be giving a huge discount for the loss of classroom experience and the savings they make on not running the school or college? Anyway, these guys were charging so much in normal times. Why can’t they give us relief?
Your etc
Vidya Pandit
Prof. AISH: Dear Vidya, this is a good time to ask what value schools or colleges provide to the students and examine how much of that value is being diluted in the current situation. Once we know it, we can make a case for a corresponding reduction in fees.
A school or college delivers value in three ways to its students:
Education serves the human need to know. Alexander Pope wrote – “A little learning is a dangerous thing; Drink deep, or taste not the Pierian spring / There shallow draughts intoxicate the brain, And drinking largely sobers us again”. Some of us want to drink deep from the Pierian spring because it opens up our minds; we enquire, we challenge, and we create new knowledge. The school or the college nurtures the curiosity of its students, provides an environment where they learn from one another and pushes the frontiers of knowledge.
It helps in making students useful to society. Most of us aren’t seeking knowledge for the sake of knowledge alone. We want to apply it to make something useful for the society which in turn provides us with a livelihood. We learn skills, we build networks and we find out what we want to do with our lives. This doesn’t happen in a single academic session. This plays out over the years and continues even after we leave the institution. The instrumental value of education is to earn a livelihood for most of us
That’s not enough though. Education is also meant to ‘credential’ you. The school or college you go to signals your capability. First, in getting into that school or college and then graduating from it. The tougher the process of getting into one, the better your credentials. The degree or the certificate at the end of it is an important outcome of education. It is an authenticated signal to the world of your usefulness. It solves the information asymmetry problem between you and those who want to hire you. It helps society repose its faith in you for that skill.
Now, let’s ask ourselves what the moving of one academic session online does to these three sources of value. If you are at a top school or college that’s difficult to get into and where you have multiple years of education still left, does this move impact your ability to signal your credentials to the outside world? The answer is no.
How about #2? Is your ability to earn a livelihood in the long-term being compromised? You continue to be at a good school, you are part of the network and you will learn the skills for which the society will pay you. Since everyone is going through the same experience, there’s no relative disadvantage that you are carrying.
That leaves us with the first point. Is your ability to learn compromised for this session? The answer is a qualified yes. For many, learning is a social process. The presence of other students, the ambience of the classroom and the direct interactions between teachers and students make the learning experience richer. Some of this is definitely being lost as part of this move online.
So, I would say the value of good schools and colleges that have stellar track record isn’t being diminished in a big way because of this move. Forcing them to cut fees in a big way hurts them. They will have to either reduce the salaries or cut down the number of their staff. This will have a long-term impact on them and, in turn, on you. This is avoidable. Also, there are costs of the school or college going online. These include enabling an online learning management platform, linking to video conferencing tools and making the content online ready. These might offset the savings on utilities and other costs of running the school in the normal course. Finally, there are second order effects of reduction in tuition fees by a good school or college that’s financially sound. Similar demands will be made of institutions that might not be able to afford a cut in tuition fees. This might lead to less fortunate schools or colleges that cater to poorer socio-economic sections to lay-off their faculty or, worse, shut down.
On the balance, a 10 per cent reduction in the tuition fees might be an optimal economic choice for everyone involved.
In the long run, the government should make it easier for schools and colleges to begin operations and give them the freedom to choose a mix of online and offline learning. More competition will reduce fees.
Q3: Dear Prof, the poor have been disproportionately affected by the fallout of COVID-19. Hunger and starvation have increased. The rich can do their social distancing, work from home, and have online education for their children, but what about the poor? Isn’t this situation a consequence of the growing inequality in our society?
Your etc
Hriday Pilpilekar
Prof. AISH: Dear Hriday, you’re right to observe that the poor have been disproportionately impacted because of COVID-19. However, that’s not a blinding insight, frankly. Virtually every disaster has the worst impact on the most vulnerable groups. Even in communal flare-ups, it’s the poor who get targeted.
However, the reason for this unfortunate situation is not inequality but poverty. The poor have no support system to fall back to in times of crises. Even if our government earnestly tries to solve the problems of the poor, it doesn’t have the resources to support every poor person. This is especially true during a crisis when the government’s attention is focused on averting the immediate crisis — a health emergency in the case of COVID-19.
The only long-term solution to this conundrum is to keep reducing the number of people in the most economically vulnerable cohort day after day. This would be true “self-reliance”. We want to get to an equilibrium where all Indians at least earn enough so that they can avoid the worst outcomes of a calamity on their own, without having to depend on the largess of the government in tough times.
And how can we do this? Through economic growth. Redistribution alone won’t work in the long run because the government will run out of people to extract from. The economic pie is just too small at present to be able to satiate everyone.
Our friend Nitin Pai has a nice thumb rule: every 1% GDP growth can bring nearly 2 million people out of poverty. This is why economic growth is moral, not just instrumental.
It’s surprising that despite this moral imperative of growth, the term has gained negative connotations. Without sufficient economic growth, a discussion on inequality is moot. Every crisis will keep hitting the poorest in the worst possible way and we will have only ourselves and our governments to blame.
HomeWork
Reading and listening recommendations on public policy matters
[Article] Jordan Weismann argues in the Slate on why Harvard is right in charging the full tuition. He speaks of the second-order effects as well.
[Article] Everything that’s wrong about understanding nepotism. People indulge in nepotism because of the way incentives work. Not because they are bad people.
[Article] Is Nepotism Bad? An old Forbes article covers some good ground on understanding the reasons for nepotism and a few advantages of it.
[Article] A Mint long-read by Sayantan Bera on the likelihood of agriculture sector saving the day for Indian economy in FY ‘21.