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Paying for freedom: Indentured labour and strategic default


  • Bose, Pinaki
  • Compton, Ryan A.
  • Basu, Arnab K.


The focus of this paper is on labour arrangements characterized by indenture, bondage, or slavery, and the design of credit market policies to free these labourers. We examine bonded or indentured labourers that pay a fee to their patrons or employers for freedom from bondage in a multi-period game between the patron, labourers, and other lenders, where a labourer borrows the fee from a third party lender. Labourers are heterogeneous: they differ in their cost of committing strategic default in repaying the loan. The patron’s determination of the fee, and the possibility of strategic default by the labourer, are two key features that drive our results. Productivity gains are greatest when labourers with both high and low default costs pay the fee. However, there also exists a less socially optimal outcome where only the low default cost labourer participates. Importantly, we also develop a theory of the existence and persistence of bondage.

Suggested Citation

  • Bose, Pinaki & Compton, Ryan A. & Basu, Arnab K., 2020. "Paying for freedom: Indentured labour and strategic default," Economic Modelling, Elsevier, vol. 89(C), pages 502-511.
  • Handle: RePEc:eee:ecmode:v:89:y:2020:i:c:p:502-511
    DOI: 10.1016/j.econmod.2019.11.023

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    References listed on IDEAS

    1. Millward, Robert, 1982. "An Economic Analysis of the Organization of Serfdom in Eastern Europe," The Journal of Economic History, Cambridge University Press, vol. 42(3), pages 513-548, September.
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    6. Kotlikoff, Laurence J, 1979. "The Structure of Slave Prices in New Orleans, 1804 to 1862," Economic Inquiry, Western Economic Association International, vol. 17(4), pages 496-518, October.
    7. Cole, Shawn, 2005. "Capitalism and Freedom: Manumissions and the Slave Market in Louisiana, 1725–1820," The Journal of Economic History, Cambridge University Press, vol. 65(4), pages 1008-1027, December.
    8. Takashi Kurosaki & Hidayat Ullah Khan, 2012. "Vulnerability Of Microfinance To Strategic Default And Covariate Shocks: Evidence From Pakistan," The Developing Economies, Institute of Developing Economies, vol. 50(2), pages 81-115, June.
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    13. Randall Akee & Arnab K. Basu & Arjun Bedi & Nancy H. Chau, 2014. "Transnational Trafficking, Law Enforcement, and Victim Protection: A Middleman Trafficker's Perspective," Journal of Law and Economics, University of Chicago Press, vol. 57(2), pages 349-386.
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    15. Chau, Nancy H., 2016. "On sweatshop jobs and decent work," Journal of Development Economics, Elsevier, vol. 121(C), pages 120-134.
    16. Arnab K. Basu & Nancy H. Chau, 2003. "Targeting Child Labor in Debt Bondage: Evidence, Theory, and Policy Implications," World Bank Economic Review, World Bank Group, vol. 17(2), pages 255-281, December.
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    More about this item


    Indentured labour; Interlinked loans; Bondage; Manumission; Strategic default;

    JEL classification:

    • J43 - Labor and Demographic Economics - - Particular Labor Markets - - - Agricultural Labor Markets
    • J47 - Labor and Demographic Economics - - Particular Labor Markets - - - Coercive Labor Markets
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development


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