Running a business is costly. Hiring good people is a big part of that cost. HR personnel, for all their expertise, still end up making what amounts to bets on new hires. The signals a prospective employee sends are muted by puffery and complicated by misaligned context: just because she may have performed well at her past job as a taco truck driver's assistant doesn't imply that Lupita will fit in well at the UNC deli counter. It's cliche to say that culture matters, but if we take it to mean that "getting on well with coworkers" matters, then it's probably too obvious to bother mentioning. How then can firms reduce costs while hiring people likely to fit in? Easy, hire family and friends. Problem solved, right?
Ha ha, right. In large organizations that enjoy government protection from competition, nepotism is a rent-sharing technique. Assuming some people would rather their friends and family make a comfortable living with fewer labor inputs, a hospital manager might suggest to a golfing buddy that their cousin who just graduated law school find work at the courthouse in return for the County Exchequer's (is that a real job?) youngest's consideration for that phlebotomist position that just opened up. No matter whether those workers are best suited for the positions, since this horse trade maximizes a joint utility function rather than a profit formula, which, in a regulated monopoly is fixed anyway. The question to ask when fretting over whether nepotism is a net benefit or a net cost is what characterizes the nature of the firm under consideration.
Now, in a perfectly competitive industry where the production function components are separable, any deadweight costs of nepotism eat market share. If rents are to be had, and they usually are, then it's unclear who bears the costs. Conditional on the size of the firm and its relationship with government, customers could pay in the form of poor service, taxpayers could pay with wasted marginal tax dollars, co-workers could pay in aggravation or politicians could pay in face. The costs that impinge on customers drive moral outrage towards nepotism, those that impinge on politicians determine the probability of prohibition. Therefore, any whiff of nepotism in direct government employment (at least at the federal level) is relentlessly squashed. Contrarily, in small businesses nepotism isn't merely tolerated, it's often celebrated. No politician is happier than when they're crowing about small, family-owned businesses. How about intermediate cases? How do people feel about nepotism in school districts? Hospitals? State contractors?
For a euvoluntaryist, these are interesting questions. I'd like to know when nepotism stops being euvoluntary and starts being exploitative. What defines the range over which there is moral displeasure with nepotism but no regulation? Do those positions that are regulated enjoy efficient regulation (that is, does the marginal benefit of regulation outweigh the marginal cost)? What forces within a firm might keep the costs of nepotism in check? If government were restrained from offering special favors to industry, how would the problems of nepotism change?
I don't affirmatively know the answers to these questions. This is not an instance where armchair theorizing will shed much light. This is one of those shoe-leather cases where a researcher needs to do the ol' sleeve-roll and investigate up close and personal. Please feel free to share your own stories in the comments.