This master thesis investigates the welfare effects for bonded laborers (kamaiyas) in Western Terai of a ban on permanent labor contracts in July. 2000. The barr was credibly enforced and within a short time the number of bonded laborers was reduced significantly. By and large the bonded labor institution in this region must be seen as a voluntary agreement whereby a risk averse worker entered into an annual, labor contract with a risk neutral landlord. The contract provided a fixed income which smoothed consumption for the worker, who thereby avoided exposure to an unpredictable labor, market for casual workers. The kamaiya worker received, other benefits well, such as housing, food and access to credit. However, the working hours for kamaiyas were very long. The former kamaiyas may be divided into two groups, those who have become sharecroppers and those who work as casual laborers. The bonded labor contracts have mainly been replaced by sharecropping. Both groups have in common that their annual income has become more volatile since 2000. However, I argue that both groups have become better off. The reason is that the ban on bonded labor has increased the wage level for casual workers in villages with a high presence of kamaiyas, which implies that the outside option of former kamaiyas has increased. I also argue that sharecropping is a more efficient institution than the kamaiya labor system.

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