Outside Options, Coercion, and Wages: Removing the Sugar Coating

In economies with a large informal sector firms can increase profits by reducing workers’ outside options in that informal sector. We formalise this idea in a simple model of an agricultural economy with plantation owners who lobby the government to enact coercive policies—e.g., the eviction and incarceration of squatting smallhold farmers—that reduce the value to working outside the formal sector. Using unique data for 14 British West Indies ‘sugar islands’ from 1838 (the year of slave emancipation) until 1913, we examine the impact of plantation owners’ power on wages and coercion-related incarceration. To gain identification, we utilise exogenous variation in the strength of the plantation system in the different islands over time. Where planter power declined we see that incarceration rates dropped, and agricultural wages rose, accompanied by a decline in formal agricultural employment.