The Calculus of Suspicion: A Rational Reconstruction of Kautilya's Small-n Verification Protocol

Abstract Kautilya's Arthashastra (c. 300 BCE) prescribes compartmentalised spies whose reports require multi-source cross-verification (Olivelle, 2013). This paper offers a rational reconstruction using Townsend's (1979) costly state verification framework, extended to a minimax robust control setting that accounts for parameter uncertainty and pairwise collusion risk. In a frictionless benchmark, n=4 minimises expected loss. Under Mauryan conditions, high coordination friction (γ=15), non-negligible collusion (ρ=0.1), and structural labor market dualism over threat priors and administrative costs. This make the minimax criterion (minimising worst-case loss over plausible ranges) yield n=3 as the robust optimum, termed the Safety Elbow. This small-n equilibrium hedges against unobservable structural features, including labour market dualism with an inelastic elite pool. The features parallel challenges in estimating stable macroeconomic trade-offs in modern dualistic economies where key rates prove elusive. The protocol further demonstrates adaptability. Elevated threat priors in crises (π=0.3) shift the robust optimum toward n=2. Modern digital regimes, with near-zero frictions, support larger networks. The regimes highlight how ancient institutions achieved robustness under severe informational constraints. JEL Codes: D02, D73, N35, N45, O17 Keywords: Costly state verification; Autocratic institutions; Cliometrics; Mechanism design; Kautilya; Arthashastra, Labor market dualism