The Political Economy of Debt Bondage

Abstract

Laws permitting bonded labor in a matching market for contracts subject to moral hazard are shown to have two contrasting effects: a partial equilibrium (PE) enhancement of commitment of agents' effort, and a general equilibrium (GE) impact via higher profits earned by principals. The GE effect operates when enough agents enter the market to fully utilize available capacity, creating a pecuniary externality which outweighs the PE effect on agent payoffs. Hence agents prefer minimal bonding limits consistent with full capacity utilization, while principals prefer higher limits. Efficiency may also decline with higher bonding limits if it is ex post distortionary. The model explains why low limits on bonding may be preferred politically or on normative grounds, when borrowers become more wealthy, and the range of collateral instruments widens. THE POLITICAL ECONOMY OF DEBT BONDAGE May 20 2009Abstract Laws permitting bonded labor in a matching market for contracts subject to moral hazard are shown to have two contrasting effects: a partial equilibrium (PE) enhancement of commitment of agents' effort, and a general equilibrium (GE) impact via higher profits earned by principals. The GE effect operates when enough agents enter the market to fully utilize available capacity, creating a pecuniary externality which outweighs the PE effect on agent payoffs. Hence agents prefer minimal bonding limits consistent with full capacity utilization, while principals prefer higher limits. Efficiency may also decline with higher bonding limits if it is ex post distortionary. The model explains why low limits on bonding may be preferred politically or on normative grounds, when borrowers become more wealthy, and the range of collateral instruments widens.2

Coercive Contract Enforcement: Law and the Labor Market in Nineteenth Century Industrial Britain

“…This sort of coercion can be welfare-improving for both employers and employees, as it allows employees to commit to long-term contracts, which may be highly valued. von Lilienfeld-Toal and Mookherjee (2010) show that while bonded labor has partial equilibrium benefits for credit-constrained criminal prosecutions were widely applied across 19th century Britain. Historical evidence of the importance of criminal prosecutions under Master and Servant law can be seen in the attention paid to them by Parliament: Parliamentary Commissions issued reports on Master and Servant law in 1865, 1866, 1874, and 1875.…”

Testing for Repugnance in Economic Transactions: Evidence from Guest Work in the Gulf

“…Coercion, inequity, regret, externality, and degradation are discussed by Cullenberg and Pattanaik (2004), Roth (2007), Becker and Elías (2007), von Lilienfeld-Toal andMookherjee (2010, 45), Sandel (2013), Guzmán andMunger (2014, 41), andLacetera (2016). 3 Equilibrium e ects are a focus of Genicot (2002), Basu (2007), Satz (2008), and von Lilienfeld-Toal and Mookherjee (2010): For example, the existence of the option to place oneself into indentured servitude could inhibit the development of markets for loans that would, if they existed, be preferred those now voluntarily choosing indenture.…”

Testing for Repugnance in Economic Transactions: Evidence from Guest Work in the Gulf

“…Coercion, inequity, regret, externality, and degradation are discussed by Cullenberg and Pattanaik (2004), Roth (2007), Becker and Elías (2007), von Lilienfeld-Toal andMookherjee (2010, 45), Sandel (2013), Guzmán andMunger (2014, 41), andLacetera (2016). 3 Equilibrium e ects are a focus of Genicot (2002), Basu (2007), Satz (2008), and von Lilienfeld-Toal and Mookherjee (2010): For example, the existence of the option to place oneself into indentured servitude could inhibit the development of markets for loans that would, if they existed, be preferred those now voluntarily choosing indenture.…”