Forced Labor in Labor Supply Chains: Contracting and Information Asymmetry.

This article examines how market and economic factors influence forced labor in supply chains and develops optimal contracting mechanisms for socially aware buyers to prevent coercion by labor agents under information asymmetry. Using a game-theoretic model, it shows that audit costs and the agent's recruitment capability (labor pool size) critically affect contract design: low audit costs favor intensive auditing with fair wages, while high audit costs necessitate paying above-fair wages to deter coercion. Under asymmetric information about agents' labor pools, a menu of incentive-compatible contracts is optimal, leaving surplus to agents with strong recruitment capabilities and preventing forced labor through truthful type revelation. Extending to multiple agents, a sequential reverse-auction-like contract menu ensures coercion-free outcomes and maximizes buyer profit, with the protection effect for agents diminishing as the number of agents grows. Empirical analysis using U.S. agricultural labor data illustrates that such contracting can reduce buyer costs by up to 60%, with buyers capturing most supply chain profits while limiting agent surplus and improving worker wages. The findings highlight the importance of contract pricing, auditing, and transparency in mitigating forced labor risks, especially when audit costs are high or agent capabilities are uncertain.