Rural labor and credit markets

This paper studies changes over time in the incidence of labor tying. The existingliterature is successful in explaining the emergence of this institution, but contains thecounterfactual implication that there should be an increasing trend in labor tying. However,previous contributions have so far implicitly assumed that there are no consumption-creditmarkets available to workers. I show that taking account of borrowing opportunities leads tonew predictions about the evolution of permanent labor. In particular, declines in borrowingcosts associated to efficiency gains in the financial sector lead to a fall in the fraction ofrural workers who are tied. In addition, if consumption-credit markets are operating, a fallin the size of the rural population will cause, under certain conditions, a decline in thepercentage of permanent workers. These predictions are consistent with the observed trendsin developing countries. Hence, this paper complements previous theoretical work on labortying: with its addition, the theory now explains the emergence, persistence and finaldemise of this institution.[...]