Abstract
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.
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