Indian Principal-Agent Theory, Or, How Varuṇa Helps the King to be Just

  • Harald Wiese
  • Asiatische Studien – Études Asiatiques, January 2016, De Gruyter
  • DOI: 10.1515/asia-2015-0045

What the Indian king should do with confiscated property

What is it about?

Old Indian law allows the king to punish a wrong-doer by taking away (confiscate) that person's property. In the Manusmṛti, an important Old Indian law text, one finds the “Varuṇa rule”. This rule stipulates that the king is to throw confiscated property into water. We explain this apparent waste of resources.

Why is it important?

Why does the “Varuṇa rule” make sense? 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.


Harald Wiese

For me, this paper shows once again that Old Indian texts exhibit an amazingly clever perspective on human agency. However, a society’s “understanding” of a problem or a solution to that problem need not always be present in an explicit manner. The Nobel price winner Friedrich von Hayek has stressed that useful institutions (such as markets or specific judicial rules) are often not invented or not even fully understood by us humans. Instead, they spontaneously develop and are kept if they prove useful. In this sense, institutions may embody “intelligent” solutions. I think that the “Varuṇa rule” specified in the Manusmṛti is a suitable illustration of such implicit understanding.

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The following have contributed to this page: Harald Wiese