Responsible Sourcing? Theory and Evidence from Costa Rica

Despite the widespread adoption of Responsible Sourcing (RS) codes of conduct by multinational enterprises (MNEs) on the production and working conditions at their suppliers, there is relatively little existing theoretical work or empirical evidence on their economic consequences. In particular, we know little about the effectiveness of RS to benefit firms and workers in developing countries. This paper develops a quantitative general equilibrium model to study the incidence of RS requirements on suppliers and workers in origin markets for MNE sourcing. We derive testable comparative statics and expressions of the welfare effect under different assumptions and decompose the competing forces. We then bring to bear a rich new database covering the near-universe of RS rollouts by more than 400 MNEs sourcing in Costa Rica (CR) starting in 2009, combined with firm-to-firm transaction records and employer-employee matched administrative microdata for all CR firms. We use these data to provide empirical evidence on the effects of RS rollouts on suppliers and workers in origin markets and to distinguish between different variants of our theory. In the final part, we use the empirical evidence and microdata to calibrate the model and quantify the welfare implications of different policy counterfactuals.

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