Timothée Demont : timothee.demont[at]univ-amu.fr
Lorenzo Rotunno : lorenzo.rotunno[at]univ-amu.fr
Multinational enterprises (MNEs) increasingly impose “responsible sourcing” (RS) standards on their suppliers worldwide, including requirements on worker compensation, benefits and working conditions. Are these policies just ‘hot air’ or do they impact exposed suppliers? If so, what is the welfare incidence of RS in general equilibrium (GE) on average and across worker types in sourcing origin countries? To answer these questions, we develop a quantitative theoretical model of RS and combine it with a unique new database. In the theory, we show that the welfare implications of RS are a priori ambiguous, depending on an interplay between what is akin to an export tax (+) and a labor market distortion (−). Empirically, we build a database covering the near-universe of RS rollouts by more than 400 MNE affiliates in Costa Rica (CR) since 2009, linked with firm-to-firm transactions and matched employer-employee microdata for all CR firms. Using these data, we find that RS rollouts lead to significant reductions in firm sales and employment at exposed suppliers, an increase in their salary payments to initially low-wage workers and a reduction in their low-wage employment share. We then use the estimated effects and the microdata to calibrate the model and quantify counterfactuals in GE. We find that while MNE RS policies have led to significant welfare gains among the roughly 20% of low-wage workers who are employed at exposed suppliers ex ante, the real incomes of the remaining majority of low-wage workers in CR decline due to adverse indirect effects on their wages and the domestic price index.