Certifiably Responsible? Self-Regulation and Market Response in China

Abstract

Do self-regulatory institutions in high-corruption environments attract more socially responsible firms? Or do irresponsible firms use self-regulatory institutions to shield themselves from scrutiny? Previous research suggests that self-regulation in these settings often attracts less responsible organizations (adverse selection). However, studying the SA8000 socially responsible employment certification in the high-corruption context of mid-2000s China, we show that firms holding the certification exhibited 11% higher average wages than non-adopters in the same industry and region. To explain this puzzle, we theorize the use of self-regulatory institutions in pursuit of reputation-sensitive buyers. Such buyers privately monitor their suppliers, making up for deficiencies in the institutional environment and reducing the expected returns of low-road firms bribing their way into self-regulatory institutions. Using longitudinal industrial microdata, we show that the wage advantage of self-regulators in China is indeed attributable to selection, with no evidence of a causal effect of self-regulation on wages. Consistent with our theory, foreign buyers and domestic buyers responded differently to self-regulation. In longitudinal analyses including subsamples balanced on levels and trends of pretreatment outcomes, exports increased markedly, and domestic sales did not. Finally, this form of self-regulation appears to pay off, with certification-adopters growing in size and showing slightly higher rates of firm survival.