Kinship Pressure and Firm-Worker Matching Distortions

When businesses hire employees, “the vast majority of microenterprises have no employees outside the owner’s family”.Most economists understand the propensity to hire relatives as arising from contracting frictions and missing information markets: relationships substitute for institutions. Given this understanding, common policy prescriptions include interventions designed to alleviate adverse selection or moral hazard, that might enable firms to widen the pool of potential employees, leading to better firm-employee matches. The premise of this project is that social norms or mutual insurance arrangements may be a key determinant of the propensity to hire family into businesses, and maybe a key contributor to less productive worker-firm matches. A substantial literature in anthropology suggests that firms hire relatives not as the optimal response to contracting frictions, but rather as a result of kinship pressure or mutual insurance arrangements. In these accounts firms are often reluctant to hire relatives, who are often worse employees than non-relatives due to negative selection (less able relatives request jobs) and greater moral hazard (firm owners find it difficult to levy sanctions on their relatives). Using original survey data from SME’s in Eastern Province, Zambia, researchers find evidence consistent with this, and documenting that in this context firm owners report feeling disproportionate pressure to hire relatives as employees as compared to non-relatives.This finding has been corroborated by economists in other domains, who have found that “kinship taxation” distorts firms investment and individual saving decisions. Researchers develop a randomized evaluation that would test for the existence of social norms or insurance arrangements as a key contributor toward the propensity to hire relatives. They will conduct the project with microenterprise owners in Eastern Province Zambia.