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)
"The Political Economy of Debt Bondage."
American Economic Journal: Microeconomics,
Asymmetric and Private Information
Economics of Contract: Theory
Labor Standards: Labor Force Composition