Abstract

Responsible Sourcing (RS) requirements by multinational enterprises (MNEs) impose minimum standards on worker compensation, benefits, working conditions and other production practices at their suppliers worldwide. We develop a quantitative general equilibrium model to study the incidence of RS on firms and workers in sourcing origin countries. We show that the welfare implications of RS are a priori ambiguous, and sensitive to alternative hypotheses on the motivation behind RS by MNEs and the market environment in which these policies are implemented. We derive testable comparative statics that help discriminate between the alternative hypotheses. We then build a new database covering the near-universe of RS rollouts by more than 400 MNE affiliates in Costa Rica (CR) since 2009, and combine it with firm-to-firm transaction records and matched employer-employee administrative microdata for all CR firms. We use these data to provide new evidence on the effects of RS rollouts, discriminate between model assumptions, and calibrate the model for counterfactual analysis. We find that RS is not just "hot air", documenting significant negative effects on the sales and employment of exposed suppliers, and positive effects on the earnings of their workers. Overall, we find that RS policies by MNEs in CR have increased domestic welfare, and that the gains are concentrated among initially low-wage workers, reducing inequality.