Outside Options, Coercion, and Wages: Removing the Sugar Coating
In economies with a large informal sector firms can increase profits by reducing workers’ outside options in that informal sector. We formalize this idea in a simple model of an agricultural economy with plantation owners who lobby the government to enact coercive policies—e.g. the eviction and incarceration of squatting small-hold farmers—that reduce the value to working outside the formal sector. Using unique data for 14 British West Indies ‘sugar islands’ from the year of slave emancipation in 1838 until 1913, we examine the impact of plantation owners’ power on wages and coercion-related incarceration. To gain identification, we utilize exogenous variation in the ease with which smallholders could evade the plantation system in the different islands over time. Where evading the plantation system became exogenously easier, planter power declined, incarceration rates dropped, and agricultural wages rose, accompanied by a decline in formal agricultural employment. Most of the wage increase can be statistically explained by the reduced coercion of smallholders.
We are especially indebted to Jim Robinson who, in the initial stages of the project when we were wallowing in case studies drawn from disparate times and places, encouraged us to focus on the British Empire and the under-exploited Colonial Blue Book data. We are also indebted to Elhanan Helpman for his encouragement in exploring the relationship between international trade and domestic institutions. We benefited from discussions with Daron Acemoglu, Lee Alston, Quamrul Ashraf, Magda Bisieda, Kyle Bagwell, Abhijit Banerjee, Stanley Engerman, James Fenske, Murat Iyigun, Sara Lowes, Karthik Muralidharan, Suresh Naidu, Luigi Pascali, Diego Puga, Manisha Shah, Shanker Satyanath, Alan Taylor, Duncan Thomas, Vitaly Titov, Francesco Trebbi and seminar participants at Boulder, CIFAR, ERWIT, Harvard (PIEP) , LSE, Los Andes Namur, the NBER Development Economics Conference, PSE, Ryerson, Stanford, Toronto (Law Faculty), Toulouse, Western, the World Bank, UBC, UC Davis, and UC San Diego. We thank Scott Orr, Nicolas Gendron-Carrier, Jacob Whiton and especially Jake Kantor for fantastic research assistance. A previous version of this paper was circulated under the title “The Rents From Trade and Coercive Institutions: Removing the Sugar Coating.” The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Christian Dippel & Avner Greif & Daniel Trefler, 2020. "Outside Options, Coercion, and Wages: Removing the Sugar Coating," The Economic Journal, vol 130(630), pages 1678-1714.