The Political Economy of Debt Bondage

von Lilienfeld-Toal, Ulf; Mookherjee, Dilip

doi:10.1257/mic.2.3.44

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American Economic Journal: Microeconomics: Vol. 2 No. 3 (August 2010)

AEJ: Micro Volume. 2, Issue 3 | left

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The Political Economy of Debt Bondage

Article Citation

von Lilienfeld-Toal, Ulf, and Dilip Mookherjee. 2010. "The Political Economy of Debt Bondage." American Economic Journal: Microeconomics, 2(3): 44-84.

DOI: 10.1257/mic.2.3.44

Abstract

What are the effects of restricting bonded labor clauses in tenancy or debt contracts? While such restrictions reduce agents' ability to credibly commit ex ante to repay principals in states where they default on their financial obligations, they also generate a pecuniary externality on other principal-agent pairs by reducing the equilibrium profit earned by principals. This turns out to imply that on both political and normative grounds, restrictions on bonded labor become more attractive when borrowers become wealthier or the range of collateral instruments widens. (JEL D82, D86, J82, K12)

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Authors

von Lilienfeld-Toal, Ulf (Stockholm School of Economics)
Mookherjee, Dilip (Boston U)

JEL Classifications

D82: Asymmetric and Private Information
D86: Economics of Contract: Theory
J82: Labor Standards: Labor Force Composition
K12: Contract Law

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