Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/176941
Authors: 
Herkenhoff, Philipp
Krautheim, Sebastian
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper 6922
Abstract: 
Over the last decades, the internationalization of the value chain has allowed firms to exploit cross-country differences in environmental and labor regulation (and enforcement) in ways that have led to a large number of NGO campaigns and consumer boycotts criticizing ‘unethical’ practices. How do potential ‘unethical’ cost savings on the one hand and the threat to reputation and sales on the other interact with the international organization of production? In this paper we introduce North-South differences in regulation, a cost-saving ‘unethical’ technology and consumer boycotts into a standard property rights model of international production. Contracts are incomplete, so that a firm has limited control over both investments and (un)ethical technology choices of both foreign affiliates and suppliers along the value chain. We show that international outsourcing and ‘unethical’ production are linked through a novel unethical outsourcing incentive, for which we also provide empirical support: a high cost advantage of ‘unethical’ production in an industry and a low regulatory stringency in the supplier's country favor international outsourcing (as opposed to vertical FDI). We also provide a microfounded model of investment and pricing under incomplete contracts when the production technology is a credence characteristic of the final good and an NGO investigates firms and may initiate a consumer boycott.
Subjects: 
multinational firms
international outsourcing
property rights theory of the firm
ethical production
labor standards
pollution
consumer boycotts
credence goods
NGOs
JEL: 
D21
D23
F12
F23
F61
J81
L22
L23
L31
L50
Q53
Document Type: 
Working Paper

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