The International Organization of Production in the Regulatory Void
Philipp Herkenhoff and
No 6922, CESifo Working Paper Series from CESifo Group Munich
In recent decades, NGOs and consumers have heavily criticized a large number of leading firms and their suppliers in a diverse set of industries for exploiting cross-country differences in regulation to cut costs at the expense of workers and the environment. In line with a wide range of examples, our explorative empirical analysis links these features of globalization to the international organization of production: a high cost advantage of ‘unethical’ production in an industry favors international outsourcing (as opposed to vertical integration) and most strongly so for sourcing from low-regulation countries. We rationalize this pattern by introducing a cost-saving ‘unethical’ technology, consumer boycotts, and advocacy NGOs into a standard property-rights model of the international organization of production. Contracts are incomplete, limiting a firm’s control over both investment and (un)ethical technology choices of integrated as well as independent suppliers. We identify and analyze a novel unethical outsourcing incentive, which - in line with the empirical findings - links outsourcing to unethical production. We also contribute to the modeling of NGO-firm interactions by providing a microfounded model of investment and pricing under incomplete contracts and monopolistic competition when the production technology is a credence attribute of the final good.
Keywords: multinational firms; international outsourcing; property rights theory of the firm; ethical production; labor standards; pollution; consumer boycotts; credence goods; NGOs (search for similar items in EconPapers)
JEL-codes: D21 D23 F12 F23 F61 J81 L22 L23 L31 L50 Q53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-cta, nep-hme, nep-int and nep-lab
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_6922
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