Supporting Suppliers' Economic Sustainability: Are Price Premiums Enough?

Abstract

Many multinational corporations (MNCs) are promoting sustainability along their supply chain as part of their corporate social responsibility strategies. One of the most popular mechanisms used when sourcing goods from farmers in developing countries is the payment of a price premium for products certified as sustainable. Through this strategy, MNCs seek to improve the livelihood of producers in their supply chain. We argue that in the context of commodities, a fragmented supply chain and an industry dominated by small and medium-sized producers, to achieve this goal, an MNC’s investments in its producers’ productivity is a more effective strategy than a price premium. The study uses a unique dataset of coffee farmers in Latin America and a sustainability sourcing program from one of the most important MNCs in the industry. Our results show that price premiums do not have a significant effect on the real income of coffee producers, raising concerns about the use of this strategy to promote the sustainabil...