Responsible Sourcing? Theory and Evidence from Costa Rica

About this event

The adoption of Responsible Sourcing (RS) requirements by multinational enterprises (MNEs) include minimum standards on wages, benefits, working conditions and other production practices at their suppliers worldwide. Despite the rapid growth in RS over recent years, there has been relatively little theoretical work or empirical evidence on the economic consequences. In particular, we know little about the effectiveness of RS for its stated goals to benefit firms and workers in developing countries. To guide the analysis, we develop a quantitative general equilibrium model to study the incidence of RS requirements on suppliers and workers in sourcing origin countries. We derive comparative statics and welfare expressions under different assumptions that the model nests and decompose the competing forces. We then build a new database covering the near-universe of RS rollouts by more than 400 MNEs sourcing in Costa Rica starting in 2009, and combine this with firm-to-firm transaction records and employer-employee matched administrative microdata for all Costa Rican firms. Guided by the model, we provide empirical evidence on the effects of RS rollouts on suppliers and workers and use them to discriminate between alternative assumptions. We then use the microdata to calibrate the model and quantify the welfare implications of RS and related policy counterfactuals.