Why Do They Just Do It? A Theory of Outsourcing and Working Conditions

Abstract

Nike and other companies have long been criticized for outsourcing their production to contract factories with dismal working conditions. Despite the overwhelming amount of interest, there exists no theory for studying this topic. The current paper fills this gap. In the model, the most productive firms in the North make high profits and outsource their manufacturing production to contract factories in the South. Factories pay wages that can compensate for poor working conditions, but these wages might not meet workers' basic needs. The paper studies an extension under which factory workers are not appropriately compensated for inferior working conditions.

Keywords: Outsourcing, working conditions, compensating wage differentials, labor standards, subcontracting, Nike, sweatshop

JEL Classification: F16, J81, F23, F12, J31, F66, J83