Who Pays for Labor and Environmental Standards? The influence of product substitutability on the bargaining power between retailers and suppliers

While there is evidence that production networks serving highly regulated markets can transmit labor and environmental standards (LES) to under-regulated regions, the cost distribution of complying with LES is sorely understudied. This paper provides a theoretical model of multi-product retailers selling partially substitutable goods and outsourcing production to upstream suppliers. It investigates the effects of labor and environmental regulation and consumer-driven standards: under what conditions do they result in an uneven distribution of effort, and hence cost of compliance, between producers and retailers? Results show that when products are highly substitutable a multi-product retailer can shift the cost of compliance with LES on to its suppliers. Product substitutability drives the result as a change in product characteristics affects demand of its substitutes: a source of bargaining power for a multi-product retailer. The form of the regulation also affects cost distribution: suppliers are relatively better off when public regulation rather than private regulation is imposed on downstream retailers, with implications for the political economy of standard setting. Policy makers and consumers should consider product substitutability in their interventions to prevent well-meaning LES from exacerbating producers vulnerability.


Who gets the surplus in value chains: development policies implications of value chain governance

(with F. Mayer and A. Pfaff)

Major development agancies provide poor countries with support to jumpstart their involvement into value chains. Nevertheless, evidence of their effectiveness is mixed. This paper investigates how the division of surplus between producers involved in value chains depends on their market power within (competition with producers of substitutable items) and be- tween production stages (complementary stages of production). We employ a Cournot model adapted to multistage production to generate closed-form solutions of profit shares in a linear value chain. The results show that within-stage market power is a necessary but not sufficient condition to substantially benefit from value chain participation. It needs to be complemented by between-stages market power. We evaluate the effects on surplus distribution of four policy intervention and conclude that without considering the entire industry structure (within- and between-stage competition) development policies might fail to meet their stated objectives and overwhelmingly benefit countries other than their targets.



The Effect of Road Pricing on Driver Behavior (with Matthew Gibson), Journal of Urban Economics


Other Work

Supply Chains, Jurisdictions and Forest Governance: can firms and states jointly generate efficiency and equity? (with D. Kaczan, E. Sills, A. Pfaff)


Stacking’s Impacts on ecoservices and costs: comparing payments to offsets for varied settings (with A. Pfaff, D. Kaczan, J. Proville, S. Small-Lorenz, T. Sterner).


Green sanctions can increase forest and surplus captured by poor miners (with F. Mayer, A. Pfaff, L. Rodriguez, M. A. Velez)


Multiple use protected areas can reduce both poverty and deforestation (with A. Pfaff, C. Palmer, L. Rodriguez, S. Schwarzmann)


Protected Areas’ Impacts Upon Land Cover Within Mexico: the need to add politics and dynamics to static land-use economics (with A. Pfaff, F. Santiago-Avila, L. Joppa)