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Labor-tying and poverty in a rural economy:evidence from bangladesh

Listed author(s):
  • Selim Gulesci

I show that labor-tying (being in a labor contract where the employer also acts as an insurance-provider) is an important channel through which the poor in rural Bangladesh insure themselves against risks. Using a theoretical framework adapted from Bardhan (1983), I analyze the effects of an exogenous increase in the outside options of poor women (through an improvement in their self-employment opportunities) on their and their spouses' participation in tied labor, as well as the general equilibrium effects of the treatment on the terms of the labor contracts in the village. I find that treated women and their spouses are less likely to be in tied-labor contracts. Their wages increase through two channels: (a) due to the switch from tied to casual labor contracts (b) through the general equilibrium effects in the village labor market. Furthermore, I find that the treated households form reciprocal transfer links with wealthier households in the village. These findings imply that poor households may be involved in second-best labor contracts to insure themselves against risks. When their self-employment opportunities improve, they break these ties and move to greater reliance on reciprocal transfer arrangements. Keywords: tied labor, poverty, rural labor market. JEL Classification: J43; O12; I32.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 460.

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Date of creation: 2012
Handle: RePEc:igi:igierp:460
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  1. De Weerdt, Joachim & Dercon, Stefan, 2006. "Risk-sharing networks and insurance against illness," Journal of Development Economics, Elsevier, vol. 81(2), pages 337-356, December.
  2. Pranab K. Bardhan, 1983. "Labor-tying in a Poor Agrarian Economy: A Theoretical and Empirical Analysis," The Quarterly Journal of Economics, Oxford University Press, vol. 98(3), pages 501-514.
  3. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2005. "Insurance within the Firm," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1054-1087, October.
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  11. repec:dau:papers:123456789/4392 is not listed on IDEAS
  12. Braverman, Avishay & Stiglitz, Joseph E, 1982. "Sharecropping and the Interlinking of Agrarian Markets," American Economic Review, American Economic Association, vol. 72(4), pages 695-715, September.
  13. Dreze, Jean & Srinivasan, P. V., 1997. "Widowhood and poverty in rural India: Some inferences from household survey data," Journal of Development Economics, Elsevier, vol. 54(2), pages 217-234, December.
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  15. Paxson, Christina H, 1992. "Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand," American Economic Review, American Economic Association, vol. 82(1), pages 15-33, March.
  16. Coate, Stephen & Ravallion, Martin, 1993. "Reciprocity without commitment : Characterization and performance of informal insurance arrangements," Journal of Development Economics, Elsevier, vol. 40(1), pages 1-24, February.
  17. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 103-114, Summer.
  18. Martin Neil Baily, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 37-50.
  19. Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
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