Tricked into trouble: Deception, confinement, and threat in exploitative labor relations

Exploitative labor conditions are a massive global challenge. We present a principal-agent model of labor markets where heterogeneous principals can deceive, confine, and threaten agents. We analyze principals’ incentives to exploit, welfare consequences, and licensing as a countermeasure. We find negative spillovers from delinquent to legitimate employers who are forced to compensate agents for their victimization risk. Somewhat paradoxically, sanctioning exploitation does not necessarily improve welfare, as it reduces
intensity but may increase prevalence. We advance theory on exploitation by modeling deception and endogenizing delinquency by principals. We uncover previously unknown market distortions and identify pitfalls for policy interventions