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The International Organization of Production in the Regulatory Void

Author

Listed:
  • Philipp Herkenhoff
  • Sebastian Krautheim

Abstract

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.

Suggested Citation

  • Philipp Herkenhoff & Sebastian Krautheim, 2018. "The International Organization of Production in the Regulatory Void," CESifo Working Paper Series 6922, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6922
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    File URL: https://www.cesifo-group.de/DocDL/cesifo1_wp6922_1.pdf
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    References listed on IDEAS

    as
    1. Kohler, Wilhelm & Smolka, Marcel, 2014. "Global sourcing and firm selection," Economics Letters, Elsevier, vol. 124(3), pages 411-415.
    2. Arnaud Costinot & Lindsay Oldenski & James Rauch, 2011. "Adaptation and the Boundary of Multinational Firms," The Review of Economics and Statistics, MIT Press, vol. 93(1), pages 298-308, February.
    3. Laura Alfaro & Paola Conconi & Harald Fadinger & Andrew F. Newman, 2016. "Do Prices Determine Vertical Integration?," Review of Economic Studies, Oxford University Press, vol. 83(3), pages 855-888.
    4. David P. Baron, 2001. "Private Politics, Corporate Social Responsibility, and Integrated Strategy," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(1), pages 7-45, March.
    5. Aldashev, Gani & Verdier, Thierry, 2009. "When NGOs go global: Competition on international markets for development donations," Journal of International Economics, Elsevier, vol. 79(2), pages 198-210, November.
    6. Loureiro, Maria L. & Lotade, Justus, 2005. "Do fair trade and eco-labels in coffee wake up the consumer conscience?," Ecological Economics, Elsevier, vol. 53(1), pages 129-138, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    multinational firms; international outsourcing; property rights theory of the firm; ethical production; labor standards; pollution; consumer boycotts; credence goods; NGOs;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • J81 - Labor and Demographic Economics - - Labor Standards - - - Working Conditions
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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