Why do they JUST DO IT? A Theory of Outsourcing and Working Conditions

Nike and other brand 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 studying this topic. The current paper fills gap. framework embeds a compensating-wage-differentials model into global sourcing Antràs Helpman (2004). In model, most productive firms in North make high profits outsource manufacturing South. Manufacturing is inherently dangerous. level conditions depends on provision cost country’s labor productivity. To attract workers, pay wages that can compensate poor being higher, factory might not meet workers’ basic needs, but reason productivity too low. benchmark only source comparative advantage between two countries difference productivities. Thus, low-productivity country more contracts since its produce at lower costs. also studies an extension which workers misperceive true comply local legal standards. Under extension, are appropriately compensated inferior Moreover, differences degree misperception noncompliance be additional sources countries.