Non Governmental Regulation and the Threat of Market-Based Sanctions

Abstract

International NGOs exert increased pressure on multinationals to force them to apply social standards in their subcontractors in developing countries. Non governmental regulation of environmental and labour standards has emerged as a response to the inefficiency of traditional governmental mechanism to regulate the increasing global production sharing. However, non governmental regulation relies on "voluntary" standards defined by NGOs or by firms themselves. The outside pressure by international organizations and civil society constitutes for the firm a social risk. Two forms of nongovernmental enforcement prevail: warning versus immediate punishment. We develop a theoretical model in order to study under which conditions it is optimal to reveal or not reveal information to the firm about the social risk. We show that warning (i.e. revealing information) is preferred to punishment (i.e. not revealing information) when the reputation of the firm is sufficiently high. While over a given threshold, the NGO’s efficiency in doing monitoring matters.

Keywords: CSR, NGOs, Enforcement

JEL Classification: J51, J80