Does Compliance Pay? Firm-Level Trade and Social Institutions

45 Pages Posted: 15 Dec 2016 Last revised: 28 Feb 2017

Greg Distelhorst

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Richard M. Locke

Brown University; Massachusetts Institute of Technology (MIT) - Department of Political Science

Date Written: December 14, 2016

Abstract

How does international trade shape social institutions in the developing world? The research literature is conflicted: importing firms may demand their trading partners adhere to higher labor and environmental standards, or they may penalize higher standards that raise costs. This study offers the first large-scale analysis of how firm-level trade responds to information about social standards. Contrary to the "race to the bottom" hypothesis, it finds that importers reward exporters for complying with labor and environmental standards. In difference-in-differences estimates from over two thousand manufacturing establishments in 36 countries, achieving compliance is associated a 4% [1%, 7%] average increase in annual purchasing. The effect is robust to controlling for manufacturing performance and reflects both rewards for reaching compliance and penalties for falling out of compliance. The results suggest that activist campaigns and transnational private regulation have created economic incentives for higher social standards in certain trade relationships.

Suggested Citation

Distelhorst, Greg and Locke, Richard M., Does Compliance Pay? Firm-Level Trade and Social Institutions (December 14, 2016). Watson Institute for International and Public Affairs Research Paper No. 2017-37; MIT Political Science Department Research Paper No. 2017-1; MIT Sloan Research Paper No. 5192-17. Available at SSRN: https://ssrn.com/abstract=2885455

Greg Distelhorst (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://www.gregdistelhorst.com

Richard M. Locke

Brown University ( email )

111 Thayer Street
Box 1970
Providence, RI 02912-1970
United States
(401) 863-3596 (Phone)

Massachusetts Institute of Technology (MIT) - Department of Political Science ( email )

77 Massachusetts Avenue
Cambridge, MA 02139
United States

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