The CAT and Transaction Costs

It is important to remind ourselves from time to time what poverty is all about. Poverty has something to do with production. Not exactly the most esoteric bit of knowledge but often it gets forgotten in the shuffle. To produce you need to have what we call factors of production which are usually broadly classified into land, labor, and capital.

Fact of nature: all factors are limited.

Another fact: any of the factors can be inefficiently utilized.

Final fact: we are not living in a perfect world. Therefore there are immense opportunities for efficiency gains.

Labor comes from people. People are critical for production. Wasting labor — especially highly productive labor — is a crime and we pay for that crime in terms of poverty.

India is one such place where you cannot throw a stone without hitting an opportunity for improving the system with the most minimal of effort. Take the recent CAT affair. Apparently, the Common Admissions Test which is held for the Indian Institutes of Management (IIMs) hit a snag — the questions were leaked. No surprise there. The stakes are high since about one in nine applicants gets to attend the coveted IIMs. The incentives exist for gaining some advantage, by fair or foul means.

Now it is all a big mess. About 125,000 students will have to retake the exam. Imagine the economic loss. Students taking exams, and institutes spending resources for selecting students is part of the transaction costs which I keep harping on. If one can reduce these costs, production goes up and consequently meet the necessary condition for reducing proverty.

Coming back to the CAT. Where could the problem manifest itself? At the printing press to begin with and in all the intermediate locations till one gets to the exam hall. Do we still need to rely on printing the question paper at a centralized location and then have complicated logistics of safely transporting these to dozens of examination centers and guard against leaks? Clearly there are cheaper alternatives. My proposal is to use ICT. Here is what you do.

Publish the CAT exam paper on the internet.

That way you don’t have to print it centrally. Just download it from the web to your local computer an hour before the exam. Then print out the question paper and hand it over to the students and there you have solved the problem of leaked exams. Waitaminnit is what you would say. OK, I say, I left out an important bit of the solution.

Put an encripted version on the web. So everyone has the question paper and only one person has the key. An hour before the exam begins, the key is sent out and used. Any publicly available encryption software would do. I leave the details of the implementation as an exercise for the reader.

I have been reading in newspaper reports that management school applicants appear for five to eight different entrance exams. So evidently the CAT is not so common. Assuming that about 100,000 students appear for about five exams on average to get into one of the management schools, you have half a million extra exams with its attendent cost. Assuming the total cost of each extra exam to be a conservative Rs 5,000, that represents a loss of Rs 2.5 billion or about US$ 55 million.

Management schools are not the only type of schools for which the competition is so fierce with its attendent multiple exams and consequent losses. There are medical schools and engineering schools and so on. A few billion rupees of waste here, and a few billion rupees of waste there, and soon you would be talking of waste on a colossal scale. All these wasted resources finally add up to poverty. Little drops of water and little grains of sand, etc…

So the solution is rather simple: have common testing exams and use the results to determine who gets admitted. The solution is not rocket science. In fact, the model exists in many other not so remote parts of the world. Most people in the education business must know about GRE, GMAT, LSAT, and so on. What we have to do is merely imitate them. (Pet gripe: we import all the junk from these countries — notice the wrestling and MTV channels and the Michael Jackson wannabees.) But we are particularly blind to the good stuff that we should be imitating.

In the end, it is all about transaction costs. We need to reduce the cost of doing stuff — be it for deciding who gets to attend which school, or for increasing market access for locally produced goods. The use of ICT is particularly suited for reducing transaction costs. We need to pay attention to that if we are concerned about India’s economic growth.

{Followup: See a simple encrypted exam questions system (SEEQS).}

Categories: Solutions, Transaction Costs

2 replies

  1. “Transaction Cost” albiet is a multi-faced acronym in the indian economic scene. The more a “transaction cost” is upped, higher is its acceptance as is paves the path to “development” of the “office-bearers”.

    So which “transaction cost” will be reduced? We need to find ways to root out the malign to bring the benefit of lower transaction costs to alleviate poverty. It is poverty that keeps the power to be in place.



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