Modern slavery, corruption, and hysteresis

We develop a model where firms profit from coercing workers into employment under conditions violating national law and international conventions and where corrupt public servants prosecuting violations of the rules are willing to turn cases down if bribed. Firms and public servants are heterogeneous. Firms benefit differently from the use of coerced labour whereas public servants have differing intrinsic motivations to behave honestly. Moreover, there is a socially determined warm-glow effect: honest public servants feel better if their colleagues are honest too. The determination of bribes is modelled via Nash bargaining between the firm and the corrupt civil servant. It is shown that multiple equilibria and hysteresis are possible. Depending on history, an economy may be trapped in a locally stable high-corruption, high-slavery equilibrium and major changes in government policies may be necessary to move the economy out of this equilibrium. Moreover, we show that trade bans that are effective in reducing slavery in the export industry tend to raise slavery in the remainder of the economy. It is possible that this leakage effect dominates the reduction of slavery in the export sector.