Northwestern University

The caste system in India has been dated to approximately 1000 B.C. and still affects the lives of a billion people in South Asia. The persistence of this system of social stratification for 3000 years of changing economic and social environments is puzzling. This paper formalizes a model of the caste system to better understand the institution and the reasons for its persistence. It argues that the caste system provided a tool for contract enforcement and facilitated trade in services, giving an economic reason for its persistence. A caste is modeled as an information-sharing institution, which enforces collective action. Trade is modeled as a version of the one-sided prisoner’s dilemma game, where the consumer has an opportunity to default. Consumers who default on a member of a caste are punished by denying them services produced in the caste. Various features of the caste system like occupational specialization by caste, a purity scale, and a hierarchy of castes are shown to be equilibrium outcomes that improve the efficiency of contract enforcement. The implications of the model are tested empirically using unique census data from Cochin (1875), Tirunelveli (1823) and Mysore (1941). “I am persuaded that it is simply and solely due to the distribution of the people into castes that India did not lapse into a state of barbarism”—Abbé Dubois, 18th Century French Missionar