Evidence and Impact of Social Proximity: A Study of Caste-based Hiring of CEOs in India

Social proximity leads to inefficient outcomes if there is favor for one’s own group members and discrimination against others for “taste-based” reasons (Becker, 1957). But, if preference for members of one’s own group is associated with trust and enhanced information, social proximity and discrimination can be economically efficient. Emerging markets, such as India, are characterized by institutional and behavioral uncertainties. In the absence of strong institutional enforcement mechanisms, firms tend to rely on various softer aspects in selecting their CEOs in order to reduce possible behavioral uncertainty e.g., moral hazard. The caste system of India and its many religions offer a natural setting, with serious consequences for theory and practice, to study social proximity. Social proximity (in terms of caste) could serve as an informal enforcement mechanism and could reduce moral hazard by social sanction thereby lowering monitoring costs.