Protecting labor rights: Contract design and coordination between brand firms and suppliers

Abstract

This paper explores the design of a contract aimed at coordinating brand firms and their suppliers to collectively protect the suppliers’ labor rights. It finds that a unilateral cost-sharing contract can incentivize suppliers to protect labor rights, while improving the profits of both brand firms and their suppliers. However, such a contract fails to coordinate the supply chain because of an insufficient incentive for both involved parties. Two improved contracts of this contract can coordinate brands firms and their suppliers to improve their efforts to protect labor rights under certain conditions while failing to achieve coordination. Accordingly, this research proposes a bilateral cost- and revenue-sharing contract. The results indicate that with an appropriate revenue-sharing proportion, this contract effectively encourages brand firms and their suppliers to participate in protecting labor rights and coordinate the supply chain. In addition, an increase in the proportion of prosocial consumers incentivizes brand firms and their suppliers to improve labor rights. Nonetheless, consumers’ excessive reliance on brand goodwill to evaluate the total supply chain efforts to protect labor rights will reduce their efforts. Finally, as the impact of labor rights protection efforts on reference prices increases, it can stimulate brand companies and suppliers to increase investment in improving labor rights. At this high impact level, the reference price in the centralized model may surpass that in the unilateral cost-sharing contract. However, if supply chain members invest little effort to protect labor rights, the increase in this impact could reduce consumers’ reference price.