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

Exploitative labor conditions are a massive global challenge, generating substantial illicit gains for delinquent employers. However, their strategic logic remains poorly understood. Here, we study the three practically most relevant forms of exploitative employer behavior in a principal-agent setting: deception,
threat, and coercion. We analyze principals’ incentives for using these means, their welfare consequences, and the effects of introducing licensing to mitigate prevalent deception. We find that exploiters’ use of deception harms not only agents but also legitimate employers who are forced to compensate agents for
the risk of exploitation. Moreover, we observe that increasing the costs of exploitation does not necessarily improve social welfare, as it can incentivize more employers to use milder forms of exploitation. Overall, we improve the economic understanding of exploitative labor relations by separating threat and coercion, integrating deception, providing insights into resulting market distortions, and identifying crucial pitfalls for seemingly first-best policy interventions.