Indian Principal-Agent Theory, Or, How Varuṇa Helps the King to be Just
Economic principal-agent theory deals with asymmetric information. It has two aspects. (i) If one person is better informed than another one, the former may outwit the latter. Kauṭilya, the Arthaśāstra’s author, and other artha or dharma authors had a very good understanding of outwitting. (ii) Economic theory teaches that the person in command of superior knowledge may not always be able to benefit from this knowledge. He may need the uninformed side to agree to some mutually beneficial venture. The very fact of asymmetric information may then harm also the informed side. Judging from the literature surveyed by the author, the artha and dharma literature had no explicit (openly expressed) understanding of this second aspect. In the author’s mind, this discussion is related to the “Varuṇa rule”. This rule (specified in the Manusmṛti) stipulates that the king is to throw confiscated property into water. We explain this apparent waste of resources as an implicit solution to the second aspect of principal-agent theory mentioned above.