Sunday, August 23, 2009

"The counterintuitive economics of Marwari weddings"- or “ The social distortions caused by lack of organized finance”

Two of my friends got married recently- one a Marwari and the other a South Indian Brahmin. Both are roughly of similar economic status- but the contrast between their weddings was striking- my Marwari friend had an ostentatious wedding with exorbitant ‘gifts’ from the bride’s family, while my other friend’s wedding was a much more simple affair, with no garish display of wealth or expectation of dowry of any kind.

As I thought about it, this seems fairly typical- most business families have ostentatious weddings and the practice of dowry is highly prevalent, while with most service-class families, the weddings are much more low key and dowry is practically non-existent.

To explain this I have a theory (as usual!). Ostentatious weddings are actually a low cost strategy! And dowry is in the interest of the woman!

Both of these phenomena can be explained as necessary evils in the absence of well-functioning organized sources of finance.

Consider the first question: Why do business communities have ostentatious weddings? On the face of it, it seems like an unnecessary expense- a large cost incurred with no obvious benefit- something which does not make ‘economic sense’

In economics, very often, if there is a significant cost incurred with no apparent direct benefit, the explanation is ‘signalling’

In a system, where organized sources of finance (like banks) did not exist, most finance for business was sourced from other members of the community. An ostentatious wedding is a low cost way for a businessman to signal his credit-worthiness (or more broadly to signal the overall reputation of his business). The purpose of signaling is to reach a ‘separating equilibrium’ (as in a strategy that cannot be copied easily and hence helps in distinguishing or separating the pretenders from the rest). Choosing a wedding as the means to achieve the separating equilibrium is actually lower cost for the truly credit worthy- since it is a one-time expense where several people of the community can be signaled to simultaneously

This incurring of a seemingly unnecessary cost to act as an ostentatious signal is also found in nature, most vividly with the showy peacocks. The vivid colors of a peacock are a ‘waste’ of genetic resources (which could have been ploughed more productively into more food or genetic material) and it also increases its risk of being spotted and hunted down by predators. But it is precisely that which makes it a powerful signal!- the peacock is signaling to its potential mate- that it is so superior genetically, that it can afford to waste genetic resources on ostentatious displays of beauty, which not only do not add to its survival chances (the peacock’s tail does not have any direct utility for survival), but actually reduces them (with the risk of being preyed upon). The right amount of signaling is of course one that maximizes the net benefit(too much signaling is costly and could lead to the death of the peacock by being hunted by predators , too little could lead to it not being able to attract a peahen which means it cannot pass on its genes)

A showy wedding is the human equivalent of a peacock’s tail.

Now to the second question- on why business families have a practice of dowry- my theory is that it was actually in the interest of the women!

It has been argued by several others- that dowry was actually an efficient means of wealth transfer to daughters. This makes sense, it would be better to transfer wealth to the daughter at the time of her wedding, when she is to leave her father’s house, rather than will it to her, since it would only cause disputes between her and her brothers, without the benefit of resolution by the father.

While this explains why dowry may have existed, it does not explain why it is much more prevalent in business as opposed to service-oriented families.

To that, my hypothesis is that dowry is a way to secure the future of the sub-unit (of the daughter and son-in-law) in the larger construct of the joint family.

To understand this, consider the trajectory of a typical family business’s expansion- a member of the family expands the business by opening ‘his’ unit (e.g. if the family runs jewelery shops, one of the sons would open a new shop- which he would operate)

Starting these units requires upfront capital investment, and it makes sense for money to be transferred at the time of the wedding, so that the son-in-law has enough money to strike out on his own, thus securing his stature and importance within the joint family.

Both of these social phenomena would not exist had there been access to organized sources of finance- credit worthiness would then be solved for by screening (as in the use of more sophisticated criteria by a bank to assess credit worthiness) rather than by signaling alone (Note: Signaling and screening are the 2 solutions to the classic problem of asymmetric information in economics)

Similarly, a businessman would have relied upon a bank, VC or PE fund for project finance for his new venture, and would not have required dowry as a source for the upfront capital investment.

I find this particularly interesting, since in my last project I came across several sub-optimal economic choices when access to finance was denied- its fascinating to see social evils also owe their origin to the same reason.