Sourcing from Conflict Regions: Policies to Improve Transparency in International Supply Chains

Oliver Lorz , RWTH Aachen University

Illegal mining in developing countries and its implications, such as civil conflicts, corruption and pollution, have generated a critical debate among national governments, NGOs and private companies. In this paper, we set up a theoretical model to study how policies aimed at improving transparency with regard to such conflict materials may influence prices, illegal mining activities and welfare. Our economic model builds on two pillars: One is a Dixit-Stiglitz framework of monopolistic competition that determines equilibrium resource prices. The other is a Tullock rent-seeking contest to describe the supply of conflict materials. We distinguish two regions, North and South, each consisting of two countries. The North imports raw materials from the South to produce differentiated varieties of a manufacturing good. In one of the South countries, a conflict for raw material extraction is related to rent-seeking and illegal mining. In this setting, one of the North countries can either implement an embargo against the conflict country in the South or introduce a certification system to distinguish legal from illegal mines in this country. We find that the embargo lowers resource prices in the conflict country as well as illegal mining and rent-seeking. The certification system raises prices for legally mined resources, while the price for illegal resources further declines. This makes certification a more powerful instrument to combat illegal mining.

About the speaker
Oliver Lorz received his doctoral degree in Economics from the Christian Albrechts University of Kiel. Before coming to Aachen he held positions at the Kiel Institute of World Economics and at the University of Konstanz. He was a visiting research scholar at the Massachusetts Institute of Technology and at the National Bureau of Economic Research in Cambridge, USA. His research focuses on international trade and international political economy, and he has published in the Journal of Urban Economics, Canadian Journal of Economics, Public Choice, Journal of Population Economics, Economics Letters, among others. Since 2004, Oliver Lorz has headed the International Economics Unit at RWTH Aachen University.

Venue: Conference room

Date: 16 June 2016

Time: 12:30 - 13:30