The Impact of Supply Chain Structures on Corporate Social Responsibility

Abstract

Markets are paying increasing attention to the social and environmental impacts of business. As a consequence, the problem of incentivizing upstream firms in a supply chain (i.e., suppliers) to engage in Corporate Social Responsibility (CSR) activities has become of pivotal importance. Formal contracts may not serve the purpose, as CSR activities are not necessarily verifiable. In this chapter, we posit that incentives for CSR can be provided through the supply chain structure, which consists of the distribution of ownership rights over the assets of production, and involves horizontal and/or vertical alliances among supply chain members. To this end, this chapter illustrates the effects of supply chain structure on CSR adoption using three case studies. For each case, the chapter highlights the interplay of forces that arises as a result of the supply chain structure, such as pooling, free-riding, and countervailing power, and discusses their impact on incentivizing supply chain parties to invest in CSR.

Appendix

1.1 The Use of the Shapley Value in Cooperative Game Theory

The Shapley value is one of the main solution concepts in cooperative game theory. A cooperative game consists of two ingredients: players and payoffs. An n-person game in characteristic function form is defined by a pair (N, v(⋅ )), where N is the set of players and v(⋅ ) is the characteristic function. The characteristic function assigns a value to every nonempty subset (or coalition) of the set of players. This value has to be interpreted as the benefit or cost that will be established when the players in the coalition cooperate. The characteristic function form describes the strategic situation. Consider the following three-players shoe game:

$$\displaystyle\begin{array}{rcl} & v(\{1,2,3\}) = 1,\quad v(\{1,3\}) = v(\{2,3\}) = 1,\quad v(\{1,2\}) = 0,& {}\\ & v(\{1\}) = v(\{2\}) = v(\{3\}) = 0, & {}\\ \end{array}$$

which describes a scenario where player 1 and 2 own one right-hand shoe each, while player 3 owns a left-hand shoe. The game then is such that the value of a matched pair of shoes is 1, while an unmatched pair is worth 0. The Shapley value for player i can be computed as the average of the marginal contribution of player i to its predecessors for all the possible orderings of players. In the shoe game there are six possible orderings of the players: {1, 2, 3}, {1, 3, 2} {2, 1, 3}, {2, 3, 1}, {3, 1, 2}, and {3, 2, 1}. The marginal contributions of player 1 to the predecessors in each of the orderings is, respectively: 0, 0, 0, 0, 1, 0 as player 1 brings a worthy contribution only when he is preceded by player 3 and the left-hand shoe had not already been matched by player 2. The Shapley value for player 1 then is 1∕6. Following a similar procedure, one can determine the Shapley value of players 2 and 3, equal to 1∕6 and 2∕3, respectively.