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The Political Economy of Debt Bondage

  • Ulf von Lilienfeld-Toal
  • Dilip Mookherjee

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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Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 2 (2010)
Issue (Month): 3 (August)
Pages: 44-84

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Handle: RePEc:aea:aejmic:v:2:y:2010:i:3:p:44-84
Note: DOI: 10.1257/mic.2.3.44
Contact details of provider: Web page: https://www.aeaweb.org/aej-micro
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  1. Lester, V. Markham, 1995. "Victorian Insolvency: Bankruptcy, Imprisonment for Debt, and Company Winding-up in Nineteenth-Century England," OUP Catalogue, Oxford University Press, number 9780198205180, March.
  2. Kaniska Dam & David Pérez-Castrillo, 2001. "The Principal-Agent Matching Market," UFAE and IAE Working Papers 503.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  3. Basu, Kaushik, 2003. "The Economics and Law of Sexual Harassment in the Workplace," Working Papers 03-07, Cornell University, Center for Analytic Economics.
  4. Genicot, Garance, 2002. "Bonded labor and serfdom: a paradox of voluntary choice," Journal of Development Economics, Elsevier, vol. 67(1), pages 101-127, February.
  5. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
  6. Genicot, Garance & Ray, Debraj, 2006. "Bargaining power and enforcement in credit markets," Journal of Development Economics, Elsevier, vol. 79(2), pages 398-412, April.
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