Abstract
Nearly 200 million children are engaged in child labor, many in developing countries that are part of the supply base of global manufacturing networks. This paper models a multinational firm in a developed country selling the product made by a supplier in a developing country. The firm can influence its supplier's use of child labor through its pricing and inspection. We find that the firm's pricing and inspection strategies work as strategic substitutes in combating child labor, so reducing the cost of inspections alone does not necessarily help to reduce child labor. When information about the firm's inspection policy is transparent, the firm's inspection strategy can become more effective, but it may inadvertently induce more child labor unless the firm adopts a zero-tolerance policy against child labor. This problem persists even when the firm uses a deferred payment that is contingent on no child labor being found during inspections.
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