Law, Social Responsibility, and Outsourcing

Previous research into enforcement of law and corporate social responsibility mostly assumes that the vertical structure of the entities causing harm is exogenous. By outsourcing, the source of harm may avoid some liability and responsibility, while losing direct control over the evasive actions that cause harm. Here, we analyze the trade off between avoidance of liability and control over evasion. (i) A brand’s preference for outsourcing increases with the extent that outsourcing reduces liability and responsibility. (ii) Evasion of law and responsibility reduces costs and increases with production scale. So, under outsourcing, the brand depresses production to induce less evasion. (iii) If the rate of expected penalty on the producer is sufficiently low and the penalty on the brand is sufficiently large, vertical integration discretely raises welfare. Integration increases production and consumer benefit, while lowering evasion, which reduces harm by more than it raises production costs.