Collaboration with a Supplier to Induce Fair Labor Practices

43 Pages Posted: 30 Mar 2018 Last revised: 8 Oct 2021

See all articles by Susan A. Slotnick

Susan A. Slotnick

Department of Operations and Supply Chain Management, Cleveland State University

Matthew J. Sobel

Case Western Reserve University; Weatherhead School of Management, Case Western Reserve University

Date Written: May 7, 2021

Abstract

The reputation of a multinational firm (a “buyer”) is hurt if its offshore supplier flagrantly violates fair labor practices. How should a buyer manage the consequent risk of reduced sales? This paper answers the question by analyzing a dynamic Stackelberg game in which the buyer offers financial incentives to the supplier to treat its work force fairly. This tactical approach to risk management corresponds to a strategic approach in which the buyer first determines its risk posture, and then identifies the most profitable financial incentives that are consistent with that risk posture. The buyer’s problem corresponds to optimizing a Markov decision process with a discounted criterion over an infinite horizon. Analytical and numerical analysis of the model shows that the buyer should rely on a contingent bonus as the primary incentive, and set the wholesale price at the supplier’s reservation price; the organization of the supply chain affects the severity of a flagrant violation of fair labor practices; and the buyer’s value function is approximated well by an affine function of reputation.

Keywords: responsible supply chain, fair labor, reputation, risk posture, dynamic program

JEL Classification: C61, L24, M11

Suggested Citation

Slotnick, Susan A. and Sobel, Matthew J. and Sobel, Matthew J., Collaboration with a Supplier to Induce Fair Labor Practices (May 7, 2021). Available at SSRN: https://ssrn.com/abstract=3149216 or http://dx.doi.org/10.2139/ssrn.3149216

Susan A. Slotnick

Department of Operations and Supply Chain Management, Cleveland State University ( email )

1860 E 18th Street, BU 542
Cleveland, OH 44115
United States

Matthew J. Sobel (Contact Author)

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

HOME PAGE: http://https://weatherhead.case.edu/faculty/emeriti-faculty/matthew-sobel

Weatherhead School of Management, Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106-7235
United States

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