Curbing the Usage of Conflict Minerals: A Supply Network Perspective

Abstract

An important source of funds for the conflict in the Democratic Republic of the Congo (DRC) is the revenue from minerals mined in the DRC. Non-profits and legislative bodies made efforts to require manufacturers that use "conflict minerals" to learn and disclose their sources. In the mineral supply chain, the critical link between mines and manufacturers is smelters. We study equilibrium sourcing decisions that arise in such a network consisting of manufacturers and smelters. We find the equilibrium depends on the total demand of "compliance-prone" manufacturers, who would choose to be compliant if the prices of certified and non-certified metals were equal. We identify the conditions for the existence of several types of equilibrium: an all-certified equilibrium in which all smelters become certified; an equilibrium in which both metal types co-exist with no shortage of certified metal; and an equilibrium in which both metal types co-exist with a shortage of certified metal. In the event that an all-certified equilibrium is out of reach, we identify how the usage of conflict minerals change as an NGO or a legislative body targets additional manufacturers. An implication of our equilibrium results is that imposing penalties on manufacturers goes only so far: If penalties induce enough manufacturers to become compliance-prone, certified metal may become so expensive that some compliance-prone manufacturers will not comply.