In 2016, JPMorgan Chase agreed to pay more than $264 million to settle allegations surrounding a hiring programme in Asia that had operated between 2006 and 2013.
The bank had created a separate pathway for candidates referred by powerful clients, executives and government officials. These applicants did not face the same competitive process as ordinary recruits. According to the Securities and Exchange Commission’s order, many were less qualified than candidates hired through the bank’s normal programmes.
The arrangement was remarkably explicit.
Employees created spreadsheets labelled “Referral Hires vs Revenue” to track the business associated with connected recruits. Over seven years, JPMorgan hired approximately 200 interns and employees at the request of clients and officials, including nearly 100 candidates referred by officials connected to more than 20 Chinese state-owned enterprises. Those enterprises generated more than $100 million in revenue for the bank or its affiliates during the period.
This was not simply a case of someone helping a relative find work. Employment itself had become a form of payment.
The scandal represents an extreme and illegal version of a much wider phenomenon. In most organisations, nepotism is not recorded on spreadsheets or tied directly to a government contract. It appears through a recommendation, an informal introduction, a legacy preference, a protected promotion or a leadership position that quietly passes from parent to child.
Each decision may seem small when viewed alone. Together, they shape who receives education, employment, capital, influence and control over major institutions.
Nepotism is often discussed as a moral failure or an example of unfairness. Its economic consequences run much deeper. When family relationships replace open competition, talent is misallocated, incentives weaken, social mobility slows and organisations become less accountable.
The immediate beneficiary gains an advantage.
Everyone else pays the cost.
What Nepotism Is—and What It Is Not
Nepotism is favouritism based on kinship, particularly when relatives receive jobs, promotions, authority or other opportunities because of their family connection. It is narrower than general favouritism and different from cronyism, which usually involves friends, political allies or members of an influential network.
The distinction matters because several different forms of inherited advantage are often placed under the same label.
A manager appointing an unqualified daughter to a senior role is nepotism. A politician rewarding a loyal associate is closer to cronyism or patronage. A bank offering an internship to a minister’s son in return for business may constitute corruption. A university favouring the child of an alumnus is practising legacy preference.
Inheritance is different again. Parents are legally entitled to transfer private wealth to their children. Family ownership of a company is not automatically nepotistic either. A founder may legitimately leave shares to an heir without making that heir the chief executive.
Even employee referrals are not inherently corrupt. A recommendation can provide useful information about a candidate’s reliability, ability or character. Smaller companies frequently recruit through personal networks because formal searches are expensive and imperfect.
The economic problem begins when the connection stops being a source of information and becomes a substitute for evaluation.
A relative may deserve the position. A founder’s child may be the most capable successor. A legacy applicant may possess excellent qualifications.
But the process becomes nepotistic when the family relationship supplies an advantage that other candidates cannot earn, removes meaningful competition or protects the beneficiary from the standards applied to everyone else.
Family support is natural.
Family entitlement is something else.
Why People Keep Choosing Their Own
Nepotism survives because it is often rational for the person practising it.
Hiring strangers involves uncertainty. Qualifications can be exaggerated, references can be unreliable and interviews reveal only a narrow version of a candidate. A family member is known. Their history, habits and loyalties appear easier to judge.
Trust also carries economic value. Owners may believe a relative is less likely to steal, reveal confidential information or abandon the organisation. Political leaders may rely on family members because relatives have fewer incentives to defect. Founders may prefer children who understand the company’s history and share an emotional commitment to preserving it.
There is also a powerful psychological motive.
People generally want their children to live better lives than they did. They pay for education, provide housing, introduce them to useful contacts and protect them during periods of failure. These actions are not aberrations. They are central features of family life.
The difficulty is that private family loyalty can conflict with institutional responsibility.
A business owner choosing a child over a stronger manager transfers part of the cost to employees, investors and customers. A university favouring an alumnus’s child reduces the opportunity available to another applicant. A public official appointing a relative places family loyalty above the public’s right to competent administration.
From the family’s perspective, the arrangement may be entirely sensible.
From the institution’s perspective, it may be destructive.
This is why nepotism cannot be explained only as corruption or bad character. It is also a coordination problem. Every influential family has an incentive to preserve advantages for its own members, even when the combined result is an economy in which access depends increasingly on birth.
From Papal Nephews to Modern Hiring Pipelines
The word nepotism carries the history of the practice within it. It derives from words meaning nephew and became associated with Renaissance popes who granted offices, influence and wealth to their relatives. Papal favouritism was so familiar that appointments based on kinship became part of the word’s identity.
Yet the underlying behaviour is far older than the term.
For much of human history, political authority, land, occupations and legal privileges passed through families. Monarchies treated government as hereditary property. Aristocratic titles moved from one generation to the next. Guilds and trades were frequently organised around family membership. The idea that positions should be opened to the most capable candidate, regardless of birth, was far from universal.
Modern meritocratic institutions emerged partly because hereditary systems became expensive.
States required skilled administrators. Armies needed competent officers. Universities needed scholars capable of producing knowledge. Businesses operating in competitive markets could not indefinitely reserve every important position for relatives without risking failure.
Historical research on European universities suggests that family-linked academic appointments declined as universities became more competitive and scientific achievement became more important. Institutions did not suddenly lose their preference for relatives. They developed stronger incentives to value ability.
Nepotism did not disappear.
It changed form.
A hereditary title became a private-school place. A court appointment became a prestigious internship. A family estate became a professional network. An inherited throne became a board seat or an executive office.
The modern economy may formally reject birthright, but it remains remarkably skilled at converting family status into apparently individual achievement.
The First Advantage: Getting Through the Door
Most careers are shaped by a series of gateways.
Someone must hear about an opening. An application must be noticed. An interview must be granted. A manager must decide that the candidate seems trustworthy. A junior employee must receive assignments that create experience and visibility.
Connections matter at every stage.
A study published through Opportunity Insights found that 29% of individuals worked for a parent’s employer at least once by the age of 30. Working for a parent’s employer increased initial earnings by an estimated 19%, largely by helping young workers gain access to higher-paying firms.
That does not mean almost one-third of young workers were handed jobs by corrupt parents.
Some may have learned about vacancies through ordinary family conversations. Others may have possessed relevant skills or interests similar to those of their parents. Employers may also value referrals because existing employees have reputations to protect and are unlikely to recommend completely unsuitable candidates.
But the evidence still reveals something important: access to employment is partly transmitted through families.
Two graduates with comparable ability may face very different labour markets. One begins with a blank list of contacts. The other begins with introductions, advice about the interview process and a parent whose credibility reduces the employer’s uncertainty.
The advantage does not need to guarantee the job to alter the outcome.
It only needs to move one application towards the top of the pile.
Once inside, connected employees may gain further advantages. They understand the organisation’s unwritten rules. They know which departments offer the strongest career paths. Their parents can explain how promotions work, which managers matter and when to leave for a better opportunity.
Nepotism is often imagined as one dramatic appointment.
More commonly, advantage arrives through a sequence of small doors that open more easily for some families than for others.
Legacy Admissions and the Inheritance of Opportunity
Elite universities occupy a powerful position in this sequence.
They do not simply provide education. They provide credentials, friendships, internships, alumni networks and access to employers that recruit from a narrow set of campuses. Admission can influence an entire professional trajectory.
That makes legacy preference more than a sentimental reward for alumni loyalty.
A major study of Ivy-Plus admissions found that legacy applicants from families in the top 1% were five times as likely to be admitted as the average applicant with similar test scores, demographic characteristics and admissions-office ratings. The researchers concluded that legacy preference explained a substantial part of the admissions advantage enjoyed by high-income applicants.
This does not mean legacy applicants are incapable students. Many would remain competitive without the preference.
The question is why parentage should provide an additional advantage after academic and personal qualifications have already been considered.
Supporters argue that legacy admissions strengthen alumni loyalty, encourage donations and sustain institutional communities. But universities do not exist only to preserve relationships with previous generations. They also distribute scarce educational opportunities whose benefits extend into employment, public leadership and wealth creation.
A preference at the admissions stage therefore travels much further than the admissions office.
The student gains access to elite professors, well-connected classmates, prestigious employers and social environments that make high-status careers appear normal and attainable. Even when the original advantage is modest, everything that follows can make the eventual outcome look entirely self-made.
This is one of inherited advantage’s most effective disguises.
By the time the beneficiary enters the workforce, the family preference has been transformed into a stronger résumé.
How Advantages Compound Across a Lifetime
Economic mobility is rarely determined by one event.
Families transmit advantages through neighbourhoods, schools, expectations, language, financial security and information. Wealthier parents can pay for tutoring, extracurricular activities and unpaid internships. They can support a child who wants to start a business, move to an expensive city or wait for the right job rather than accepting the first available one.
They can also absorb failure.
A young adult with family support can survive a failed venture, an unpaid training period or several months of unemployment. Someone without that safety net may need immediate income and cannot take the same risks.
This is why inherited advantage should not be reduced to a suitcase of money received after a parent dies. Much of it is transferred while both generations are alive.
Economists measure these patterns through several forms of intergenerational mobility, including income, education, occupation and wealth. The World Bank’s Global Database on Intergenerational Mobility includes income-mobility estimates for 87 economies and finds that higher inequality is generally associated with lower mobility.
An OECD report on social mobility describes “sticky floors” that make it difficult for people at the bottom to rise and “sticky ceilings” that help those at the top preserve their position. The pattern appears across earnings, education, occupation and health.
Nepotism strengthens both.
It creates a sticky ceiling by reserving opportunities for insiders. At the same time, it reinforces the sticky floor by reducing the returns available to outsiders who invest in education and effort.
The damage is not simply that one connected person gets ahead.
It is that everyone watching learns something about how the system works.
When qualifications repeatedly lose to family ties, people have less reason to believe that additional effort will improve their prospects. A cross-country study of nepotism and human capital found a negative association between perceived nepotism and educational performance, supporting the argument that people invest less in skills when they expect important jobs to be allocated through connections. The authors caution that the evidence is associative, but the incentive mechanism is compelling.
A meritocratic system does more than place talented people in important jobs.
It persuades millions of people that developing talent is worth the effort.
The Firm-Level Cost of Choosing Kinship Over Competence
Inside an organisation, nepotism changes behaviour long before it appears in the financial statements.
Employees quickly learn whether performance determines advancement. If a founder’s son is destined to run the company, ambitious managers know the highest position is unavailable. If a director’s relative receives desirable assignments despite weak results, colleagues understand that effort and reward are only loosely connected.
Some employees disengage. Others leave.
The organisation loses not only the person who was unfairly overlooked but also the motivation of everyone who witnessed the decision.
Nepotistic appointments can also weaken internal challenge. Employees may hesitate to criticise a relative of the owner. Senior managers may conceal problems rather than risk offending the family. Decisions become harder to reverse because removing an underperforming executive is no longer purely a business matter.
It is also a family confrontation.
The most visible cost is appointing the wrong person. The deeper cost is building an environment in which the wrong person cannot be questioned.
At a wider level, economies with deeply entrenched connections may struggle to move people towards the jobs where they can create the most value. Research has associated nepotism with weaker management, lower investment and smaller firms, although national comparisons should be treated cautiously because corruption, regulation, access to capital and institutional quality often move together.
The principle is simpler than the measurement.
A competitive economy depends on matching scarce talent with important responsibilities. Every position allocated for reasons unrelated to capability makes that matching process less efficient.
One bad hire will not destroy an economy.
Millions of protected decisions can.
Inherited Control and the Succession Problem
The stakes rise when a family member does not merely receive a job but inherits control over an organisation.
Founders are difficult to replace because their value rarely comes from a formal job description. They possess relationships, technical knowledge, authority and an instinctive understanding of the company built through years of decisions.
Their children may inherit the shares without inheriting those abilities.
Research published in the American Economic Review examined chief-executive successions and found that companies appointing CEOs related by blood or marriage to a founder, departing chief executive or major shareholder subsequently underperformed companies that appointed unrelated executives in operating profitability and market-to-book value. The study argued that restricting the leadership search to a family reduced labour-market competition.
The problem is not that heirs are always incapable. Some grow up inside the business, receive extensive training and develop a deeper commitment than an outside executive would possess.
The problem is that birth is a poor selection process.
A founder may have emerged from competition, survived repeated failures and built the company through unusual ability. The successor may receive authority before demonstrating any comparable capacity. Employees are then expected to treat inherited control as though it were earned leadership.
The incentives differ as well.
Someone who purchases a company must generate a return on the capital invested. Someone who inherits it may remain wealthy even if the business stagnates. The owner still has reasons to preserve the asset, but the pressure to improve it can be weaker when control was never won and cannot easily be lost.
Succession therefore tests whether the organisation exists to create value or to preserve family status.
Family Firms Are Not the Problem; Bad Governance Is
None of this means that family businesses are inherently inefficient.
Family ownership can create real strengths. Owners may think in decades rather than quarters. They may preserve valuable organisational cultures, invest through downturns and resist short-term pressures that would tempt dispersed shareholders or temporary executives.
Families can also provide committed capital and stable leadership when other investors would leave.
Research from UBS on large Asian family businesses found that family-controlled companies had delivered strong long-term returns and profitability. It also identified a short-term “succession dip”: companies typically underperformed during the first two years after a leadership transition before share prices recovered, while transitions between family members produced greater volatility than those involving non-family executives.
The relevant dividing line is not family versus non-family.
It is governed versus ungoverned.
A well-run family company separates ownership from automatic entitlement to management. Relatives may apply for leadership positions, but they must meet clear standards. Independent directors participate in succession decisions. External executives remain genuine candidates. Authority, accountability and ownership are treated as related but distinct.
A PwC survey of family-owned businesses similarly emphasises that successful succession depends on leadership capability and organisational need, regardless of whether the final successor comes from inside or outside the family. Clear authority, transparent communication and the involvement of non-family executives can protect both the business and the family’s long-term legacy.
The strongest family businesses do not reject family continuity.
They refuse to confuse continuity with immunity from competition.
Inheritance and the Great Wealth Transfer
Employment connections and educational advantages shape what people can earn. Inheritance determines how much some people receive without earning it at all.
Cerulli Associates estimates that approximately $124 trillion will change hands in the United States through 2048. Around $105 trillion is projected to flow to heirs and $18 trillion to charities. More than half of the total transfer is expected to originate from high-net-worth and ultra-high-net-worth households, which together represent only about 2% of households.
Inheritance does not merely increase the recipient’s bank balance.
It can eliminate rent or mortgage payments, finance education, supply the deposit for a home, support entrepreneurship and generate investment income. It allows recipients to make choices that would be dangerously expensive for someone without family wealth.
Money also buys patience.
A person with inherited assets can wait for a business to become profitable, hold investments through a downturn or reject unsuitable work. A person living from one salary to the next must prioritise survival.
This does not make inheritance immoral. Parents reasonably want to support their children, and private property would mean little if owners could not decide what happens to it.
The economic concern is concentration.
When the families with the strongest educational and professional advantages also receive most of the largest wealth transfers, separate forms of privilege reinforce one another. Connections create income. Income builds assets. Assets generate security. Security allows greater risk-taking. Remaining wealth then passes to the next generation.
Tax design determines how easily this cycle can continue. The broader questions surrounding estate taxes, stepped-up basis and how tax rules preserve dynastic wealth deserve their own examination.
Here, the central point is narrower: inheritance magnifies every advantage that arrived before it.
The Cost That Economic Statistics Cannot See
The total economic cost of nepotism cannot be calculated neatly.
Researchers can compare executive successions, admissions rates, earnings and measures of mobility. They can estimate how connections affect access to particular employers or how inherited control influences company performance.
What they cannot observe is the alternative economy that never existed.
There is no database containing the candidate who would have received the job if the chief executive’s nephew had not been hired. No financial statement records the idea that employee might have developed. No national account measures the business that was never founded because its potential creator lacked capital or contacts.
These are opportunity costs.
A protected manager may keep a company alive while preventing it from becoming better. The firm continues to employ people and generate revenue, so the damage remains largely invisible. Yet stronger leadership might have expanded production, entered new markets or invested in technology.
The same problem appears in education. A legacy student may perform adequately after receiving a place. That does not reveal what the rejected applicant might have achieved with the same opportunity.
Nepotism rarely creates a clean before-and-after comparison. It replaces one possible future with another and then asks us to judge only the future that occurred.
This is why the economic cost is easy to underestimate.
Bad institutions do not only produce visible failures.
They prevent successes that no one will ever be able to count.
What Can Reduce Harmful Nepotism?
Nepotism cannot be eliminated by telling people to stop caring about their families.
Institutions must instead make it difficult for family loyalty to override organisational responsibility.
Public-sector rules provide the clearest example. Under 5 U.S.C. §3110, federal public officials in the United States are restricted from appointing, employing, promoting or advocating for relatives in agencies under their authority or control. The law does not apply generally to private companies, but it recognises that public authority should not be treated as family property.
Private organisations require governance rather than a single universal prohibition.
Family relationships should be disclosed before recruitment or promotion decisions. Connected candidates should face the same documented criteria as other applicants. Hiring panels should include people who are independent of the referring employee. Interviews should be structured so that candidates are assessed consistently rather than through informal impressions.
Blind screening may help during early recruitment by hiding names or personal details. It cannot solve the entire problem. Influence can re-enter during interviews, work assignments, promotions and succession planning.
Senior positions require stronger safeguards.
Boards should compare family candidates with credible outside alternatives. Performance expectations should be agreed upon before appointment. Independent directors must have the authority to intervene if the successor underperforms. Ownership rights should not automatically include the right to manage.
Transparency also changes incentives. A decision-maker is more likely to examine a relative honestly when the relationship and selection process must be explained to employees, investors or the public.
None of these measures guarantees perfect meritocracy. Ability is difficult to measure, hiring always involves judgement and well-connected candidates may genuinely be the best choice.
The goal is not to prevent relatives from succeeding.
It is to ensure that their relationship does not exempt them from proving that they should.
Conclusion: A Family Connection Should Not Become an Economic Entitlement
Families will always transfer advantages.
Parents will teach their children, introduce them to useful people, pay for opportunities and leave behind whatever wealth they can. No law or hiring policy will remove the powerful human desire to help one’s own.
Nor should it.
The economic danger appears when family support becomes control over opportunities that belong to an institution, a company or the public. A parent may help a child prepare for an interview. That is different from guaranteeing the job. A founder may train an heir. That is different from excluding every stronger candidate. A university may value its community, but it should not pretend that inherited preference is academic merit.
Nepotism is attractive because its benefits are concentrated and its costs are scattered.
One family receives the position. Hundreds of rejected candidates absorb tiny pieces of the loss. One heir receives control. Employees, investors and customers bear the consequences gradually. One elite student gains admission. The person who lost the place quietly attends somewhere else.
The system rarely collapses at once.
It simply becomes less open, less competitive and less capable than it might have been.
A healthy economy does not require people to abandon their families. It requires institutions strong enough to prevent affection, loyalty and inheritance from deciding who receives scarce opportunities and important responsibilities.
A family name may open a conversation.
It should never settle the decision.
Last Updated on July 16, 2026 by Aseem Gupta