Kaushik Basu, in his paper “Teacher Truancy in India – The Role of Culture, Norms and Economic Incentives”, claims that economists often ignore the role of social norms and culture in economic analysis even though social variables, in many cases, play a critical role in determining economic behavior. He discusses the case of India, which despite experiencing tremendous economic growth in recent times, still suffers from corruption, “a grindingly slow and callous” bureaucracy, and glaring inefficiencies. In particular, he analyzes the severe problem of teacher absenteeism in government-run schools and claims that social variables may have a critical role here; even though economic incentives are largely similar across different states in India, there is a large difference in absenteeism rates ranging from a best of 14.6% to a worst of 41.9%.

The existence and persistence of such social norms, such as teachers playing truant, can be explained in the language of network effects. Basu introduces a model where the payoff to a teacher playing truant is determined in part by the social stigma associated with being truant. Each individual, on playing truant, experiences a negative payoff effect due to this social stigma; the magnitude of this stigma is a decreasing function in the number of individuals playing truant in society. In other words, if many people are playing truant, then each individual has greater incentive to play truant. This setup is qualitatively identical to our study of network effects in class and therefore similar results hold.

Multiple equilibria n* can exist in this economy, where n* is the number of individuals playing truant. Suppose there are 3 equilibria n1, n2, n3 such that n3 > n2 > n1; so, n1 is the most desirable. From our study of network effects, it is now easy to see how one economy could be caught in an undesirable equilibrium n3, whereas another economy with similar economic incentives could be at a more desirable equilibrium n1; this is the concept of “path dependence” that we have discussed. This “path dependence” suggests an economy in a “bad” equilibrium does not necessarily reflect the innate attitude of the individuals comprising the community – the very same community could persist in a “good” equilibrium. As Basu points out, this suggests that no permanent measures need to be taken to fix the problem. Implementing temporary incentives (such as greater punishment for truancy) can move this economy to a good equilibrium; however, after the economy has settled into a new equilibrium (say n1), these incentives may be removed and the economy still persists at this “good” equilibrium. Basu discusses variations in the model where the magnitude of stigma to an individual depends not on the total number of people playing truant in the population but on the number of people who play truant in the individual’s community; there is again a direct parallel with the variations discussed in class where an individual’s payoffs are affected only by the actions of his neighbors/community (such as choosing an IM system) as opposed to population-wide effects (such as choosing an operating system).