The so-called Verkingkinder – or ‘contract children' – policy ran for several decades until 1981.
The government-backed programme saw tens of thousands of Swiss children removed from their families and sent to work as cheap labour, often on farms.
Many of these contract children came from difficult families, were orphans or had sick parents who couldn't care for them. While some were treated well on their placements, many suffered sexual or physical abuse or were forced to undergo sterilization.
The Swiss government formally apologized to victims in 2013, and last year agreed a 300 million-franc compensation pot that could see sums of 25,000 francs awarded to every living victim.
On approving the compensation in September justice minister Simonetta Sommaruga said it was important to recognize the government's role in the policy, and as a result, parliament would initiate a research study to “try and understand what happened” and learn from it for the future.
On Wednesday the Federal Council granted researchers the sum of 18 million francs over five years for this purpose, it said in a statement.
The study will aim to analyze in a scientific manner the characteristics, mechanisms and effects of the Swiss policy, which was ordered within the framework of Switzerland's child guardianship service, it said.
The differences in application of the policy between the cantons will also be studied.
The results of the study will inform current social welfare policy, it added.