Mechanism Design Mechanism Design for Voluntary for Voluntary Supply Chain Supply Chain Responsibility Responsibility

Initiatives Initiatives Bruce PatonBruce PatonSan Francisco State UniversitySan Francisco State University

Greening of Industry Network ConferenceGreening of Industry Network Conference

Cardiff, WalesCardiff, WalesJuly 2006July 2006

Voluntary Supply Chain Voluntary Supply Chain Responsibility Initiatives:Responsibility Initiatives:

Definition Definition

Programs that commit firms to Programs that commit firms to manage social and manage social and environmental conduct in their environmental conduct in their supply chains beyond legal supply chains beyond legal requirementsrequirements

Key Dimensions Of Key Dimensions Of Voluntary Supply Chain Voluntary Supply Chain

Responsibility InitiativesResponsibility Initiatives High uncertainty – allows proliferation of High uncertainty – allows proliferation of

sweatshops and environmental abusessweatshops and environmental abuses Growing consumer and business customer Growing consumer and business customer

concernconcern Verifying performance is costly and Verifying performance is costly and

difficultdifficult Strong price pressures driven by Strong price pressures driven by

globalization and shift to Chinese globalization and shift to Chinese productionproduction

Weak institutional context for enforcement Weak institutional context for enforcement of laws and normsof laws and norms

Insights from Economic Insights from Economic Literature on Mechanism Literature on Mechanism

DesignDesign Purpose: Achieve a socially desirable Purpose: Achieve a socially desirable

objective in the presence of private objective in the presence of private informationinformation

Typical formulation: 1 regulator, 1 Typical formulation: 1 regulator, 1 regulated partyregulated party

Maximize social benefitsMaximize social benefits

Subject to:Subject to:

ParticipationParticipation constraints constraints

Incentive compatibilityIncentive compatibility constraintsconstraints

Mechanism Design for Mechanism Design for Voluntary Supply Chain Voluntary Supply Chain

Responsibility InitiativesResponsibility InitiativesMaximize economic value of tradeMaximize economic value of trade

Subject to:Subject to: Participation Constraint:Participation Constraint:

reasonable restrictions and reasonable restrictions and monitoring requirementsmonitoring requirements

Incentive Compatibility Incentive Compatibility Constraint:Constraint: Verifiable protection Verifiable protection against social and environmental against social and environmental abusesabuses

Mechanism Design Mechanism Design in in Voluntary Supply Chain Voluntary Supply Chain Responsibility InitiativesResponsibility Initiatives

Complex social welfare functionComplex social welfare function Many actors with different constraintsMany actors with different constraints Government faces participation and Government faces participation and

incentive compatibility constraintsincentive compatibility constraints Government not credible unless they’re in Government not credible unless they’re in

it for the long termit for the long term

A Preliminary List of A Preliminary List of ConstraintsConstraints

ActorsActors ParticipatioParticipationn

Incentive Incentive compatibilicompatibilityty

National National GovernmenGovernmentsts

budget from budget from legislature, broad legislature, broad participationparticipation

no relaxation of no relaxation of regulatory regulatory requirementsrequirements

ParticipatinParticipating Firmsg Firms

limited scope, limited scope, address relevant address relevant issuesissues

achievable goalsachievable goals

NGOsNGOs $ for data collection, $ for data collection, address relevant address relevant issuesissues

credible goals, credible goals, measurable targetsmeasurable targets

Local Local GovernmenGovernmentsts

address relevant address relevant issues, don’t issues, don’t constrain growthconstrain growth

credible goals, credible goals, measurable targetsmeasurable targets

MandatoryDiscretionary

Emerging

Existing

Opportunity Matrix

Structural Foundation

Laws, Regulations

Structural Frontier

Collective Action

Social Foundation

Norms Expectations Social Pressures

Strategic Frontier

Differentiation

Key insightsKey insights

Participation and incentive compatibility Participation and incentive compatibility constraints exist for all participants constraints exist for all participants

Identifying constraints in advance can Identifying constraints in advance can anticipate problems and identify anticipate problems and identify opportunitiesopportunities

Constraints may not be obvious – may need Constraints may not be obvious – may need to interview participants to identify themto interview participants to identify them

Participation has to have tangible and Participation has to have tangible and specific value to participantsspecific value to participants