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Quality and Environmental Regulation: Verifying Compliance along the Supply Chain

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  • Dionisia Tzavara
  • Adrienne Héritier
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    Abstract

    Among the factors providing incentives to monitor the behaviour of input suppliers are the regulatory requirements to which downstream firms are subject. We develop a formal economic model to examine the relationship between the strictness of the regulatory environment and downstream firms’ incentives to act as inspectors of their sub-contractors. We consider the interaction between a downstream producer and an upstream input supplier. The downstream chooses the probability with which to monitor the upstream’s compliance and the upstream chooses a compliance level which determines compliance of the end product with quality or environmental regulation. We find that the strictness of regulation affects the downstream’s monitoring strategy in combination with the level of quality or environmental standards. If the standards are sufficiently low then the strictness of regulation increases incentives to monitor the upstream. Contrary, if the standards are sufficiently high then the pressure on the downstream to monitor the upstream is relaxed and the strictness of regulation decreases incentives to monitor. We argue that the strictness of regulation should not be treated in isolation as a factor determining the choice of downstream firms to monitor their input suppliers.

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    File URL: http://cadmus.eui.eu/bitstream/handle/1814/15953/RSCAS_2011_16.pdf?sequence=1
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    Bibliographic Info

    Paper provided by European University Institute in its series RSCAS Working Papers with number 2011/16.

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    Date of creation: 01 Mar 2011
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    Handle: RePEc:rsc:rsceui:2011/16

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    Related research

    Keywords: compliance; monitoring; supply chain; quality and environmental regulation;

    This paper has been announced in the following NEP Reports:

    References

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    1. Wei Shi Lim, 2001. "Producer-Supplier Contracts with Incomplete Information," Management Science, INFORMS, vol. 47(5), pages 709-715, May.
    2. Héritier Adrienne & Eckert Sandra, 2009. "Self-Regulation by Associations: Collective Action Problems in European Environmental Regulation," Business and Politics, De Gruyter, vol. 11(1), pages 1-24, April.
    3. Stanley Baiman & Paul E. Fischer & Madhav V. Rajan, 2001. "Performance Measurement and Design in Supply Chains," Management Science, INFORMS, vol. 47(1), pages 173-188, January.
    4. EricW. Bond, 2008. "Input Quality, Relational Contracts And International Outsourcing," Pacific Economic Review, Wiley Blackwell, vol. 13(4), pages 391-404, October.
    5. Stanley Baiman & Paul E. Fischer & Madhav V. Rajan, 2000. "Information, Contracting, and Quality Costs," Management Science, INFORMS, vol. 46(6), pages 776-789, June.
    6. Robert C. Feenstra, . "Integration Of Trade And Disintegration Of Production In The Global Economy," Department of Economics 98-06, California Davis - Department of Economics.
    7. Kashi R. Balachandran & Suresh Radhakrishnan, 2005. "Quality Implications of Warranties in a Supply Chain," Management Science, INFORMS, vol. 51(8), pages 1266-1277, August.
    8. Hsieh, Chung-Chi & Liu, Yu-Te, 2010. "Quality investment and inspection policy in a supplier-manufacturer supply chain," European Journal of Operational Research, Elsevier, vol. 202(3), pages 717-729, May.
    9. Reyniers, Diane J. & Tapiero, Charles S., 1995. "Contract design and the control of quality in a conflictual environment," European Journal of Operational Research, Elsevier, vol. 82(2), pages 373-382, April.
    10. Iny Hwang & Suresh Radhakrishnan & Lixin (Nancy) Su, 2006. "Vendor Certification and Appraisal: Implications for Supplier Quality," Management Science, INFORMS, vol. 52(10), pages 1472-1482, October.
    11. Diane J. Reyniers & Charles S. Tapiero, 1995. "The Delivery and Control of Quality in Supplier-Producer Contracts," Management Science, INFORMS, vol. 41(10), pages 1581-1589, October.
    12. Gary H. Chao & Seyed M. R. Iravani & R. Canan Savaskan, 2009. "Quality Improvement Incentives and Product Recall Cost Sharing Contracts," Management Science, INFORMS, vol. 55(7), pages 1122-1138, July.
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