We thank Stephen Morris, Andrew Postlewaite, four anonymous referees, and seminar participants at the Canadian Institute for Advanced Research, the Determinants of Social Conflict Conference, and MIT for useful comments and suggestions.
The Economics of Labor Coercion
Article first published online: 14 FEB 2011
© 2011 The Econometric Society
Volume 79, Issue 2, pages 555–600, March 2011
How to Cite
Acemoglu, D. and Wolitzky, A. (2011), The Economics of Labor Coercion. Econometrica, 79: 555–600. doi: 10.3982/ECTA8963
- Issue published online: 14 FEB 2011
- Article first published online: 14 FEB 2011
- Manuscript received November, 2009; final revision received September, 2010.
- labor scarcity;
The majority of labor transactions throughout much of history and a significant fraction of such transactions in many developing countries today are “coercive,” in the sense that force or the threat of force plays a central role in convincing workers to accept employment or its terms. We propose a tractable principal–agent model of coercion, based on the idea that coercive activities by employers, or “guns,” affect the participation constraint of workers. We show that coercion and effort are complements, so that coercion increases effort, but coercion always reduces utilitarian social welfare. Better outside options for workers reduce coercion because of the complementarity between coercion and effort: workers with a better outside option exert lower effort in equilibrium and thus are coerced less. Greater demand for labor increases coercion because it increases equilibrium effort. We investigate the interaction between outside options, market prices, and other economic variables by embedding the (coercive) principal–agent relationship in a general equilibrium setup, and studying when and how labor scarcity encourages coercion. General (market) equilibrium interactions working through the price of output lead to a positive relationship between labor scarcity and coercion along the lines of ideas suggested by Domar, while interactions those working through the outside option lead to a negative relationship similar to ideas advanced in neo-Malthusian historical analyses of the decline of feudalism. In net, a decline in available labor increases coercion in general equilibrium if and only if its direct (partial equilibrium) effect is to increase the price of output by more than it increases outside options. Our model also suggests that markets in slaves make slaves worse off, conditional on enslavement, and that coercion is more viable in industries that do not require relationship-specific investment by workers.