Curbing the Usage of Conflict Minerals: A Supply Network Perspective

Abstract

ABSTRACT An important source of funds for the conflict in the Democratic Republic of the Congo is the revenue from mineral mining. NGOs and legislators 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 in the supply network consisting of manufacturers and smelters. We show the equilibrium depends on the total demand of “compliance‐prone” manufacturers, which would choose to be compliant if the prices of certified and noncertified metals were equal. We identify the conditions for the existence of several types of equilibrium: an all‐certified equilibrium where all smelters become certified; an equilibrium where both metal types coexist with no shortage of certified metal; and an equilibrium where both metal types coexist 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 changes as an NGO or a legislative body targets additional manufacturers. Our model does not incorporate deliberate choices by the mines to become verified conflict‐free, that may enhance the effect of the penalties in the long run. However, in the short‐to‐intermediate run, for a given pool of mines that are verified, an implication of our results is that imposing penalties on manufacturers goes only so far: If penalties induce sufficiently many manufacturers to become compliance‐prone, certified metal may become so expensive that some compliance‐prone manufacturers will not comply.

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