Caste Networks in the Modern Indian Economy

Why does caste continue to play such an important role in Indian life? One explanation is that ancient inequities and prejudices are slow to change. The higher castes, which exploited the lower castes for centuries, continue to discriminate against them both economically and socially today. A second explanation, which has been the subject of intense public debate, is that caste reservation in higher education and the government has served to perpetuate a system that would otherwise have withered away. While these explanations for caste-persistence are clearly potentially relevant, I focus on a third explanation, which has received relatively little attention. This explanation, which synthesizes research I have conducted in rural and urban India over the past 15 years, is based on the many forms of economic support that the caste provides its members. In the classical economic model, individuals are allocated to jobs on the basis of their ability, which, in turn, determines investments in human capital. Once we move away from this idealized world, however, the economic model becomes more complex. With liquidity constraints, parental income and not just individual ability determines educational attainment and, ultimately, occupational choice. Once we introduce imperfections in the labor market, the most qualified individual no longer necessarily gets the job. This is a world that perhaps better describes a developing economy than the classical model. In such a world, social networks can help individuals overcome barriers to schooling and jobs and can, more generally, substitute for market institutions. For example, in an economy with imperfect labor markets, firms will use referrals from incumbent workers when making new hires. The incumbent worker has better information about the quality of a potential hire than the firm if they