Cooperation and Punishment in Regulating Labor Standards: Evidence from the Gap Inc Supply Chain

Abstract

Multinational firms with global supply chains manage the labor compliance of their supplier firms. Does this private regulation cause compliance to improve? And what approaches to private regulation are effective? This study analyzes supply chain regulation under a largely cooperative approach and under an approach that incorporates the threat of penalties. Drawing on data from over one thousand factories supplying the multinational retailer Gap Inc over 2010-2019, it uses a regression discontinuity design to estimate the causal effects of assigning compliance ratings under these two approaches to supply chain regulation. Under the cooperative approach, we estimate precise, near-zero effects of compliance ratings on future social compliance. However, when the buyer incorporated penalties in the form of threats from the sourcing department to discontinue the business relationship with noncompliant suppliers, a failing grade caused factory compliance to improve by 0.8 standard deviations and reduced the probability of future failure by 22 percentage points. These effects are validated using independent labor compliance data from the ILO/IFC Better Work program. We also test hypotheses about the mediating effect of long-term supplier relationships and find that private regulation had a larger impact on longer-term suppliers, but again only in the presence of penalties. Notwithstanding an emerging consensus about the need for cooperation and committed commercial relationships in supply chain regulation, this study affirms the importance of incentives to enhance sustainability.

Keywords: private regulation, supply chain, social responsibility, social performance, labor standards, compliance

JEL Classification: J8, F16, F23, F66, D22