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The Efficiency Cost of the Kafala in Dubai: A Stochastic Frontier Analysis

Author

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  • Raimundo Soto

    (Instituto de Economía. Pontificia Universidad Católica de Chile.)

  • Rosalía Vásquez

Abstract

The Kafala (or sponsorship) system is the key instrument behind the economic development of the United Arab Emirates (UAE) and most Middle East economies. The system governs both labor migration and foreign investment by assigning a native-UAE sponsor to each migrant worker and each foreign investor. Sponsors enjoy significant command over these factors and extract sizable economic rents. Firms in free-zones, in contrast, are exempt from the Kafala system. Therefore, they provide an appropriate counterfactual to study the effect of policy regulations on technical efficiency. Using a representative sample of 600 firms of Dubai we estimate stochastic frontier models to identify and compare the degree of technical inefficiency between firms operating under the Kafala system and those in free zones. Our results suggest that on average technical inefficiency resulting from the Kafala amounts to 6.6% of total costs (or 11% of profits). Inefficiency is also greater among firms in Main Dubai in all economic sectors.

Suggested Citation

  • Raimundo Soto & Rosalía Vásquez, 2011. "The Efficiency Cost of the Kafala in Dubai: A Stochastic Frontier Analysis," Documentos de Trabajo 399, Instituto de Economia. Pontificia Universidad Católica de Chile..
    • Handle: RePEc:ioe:doctra:399
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    File URL: https://www.economia.uc.cl/docs/doctra/dt-399.pdf
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    References listed on IDEAS

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    Cited by:

    1. Hertog, Steffen, 2017. "Making wealth sharing more efficient in high-rent countries: the citizens’ income," LSE Research Online Documents on Economics 101305, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Labor sponsorship (Kafala); technical inefficiency; economic rents;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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