Rocco Macchiavello

18. Oktober 2016

"Relational Contracts and Vertical Integration: Evidence from the Costa Rica Coffee Chain"

Abstract:

When contracts are incomplete, market trade might be substituted by relational contracts or integration. This paper compares vertical integration and relational
contracts between coffee mills and buyers in Costa Rica. Detailed data on transactions between and within firms reveal that integrated trade is shielded
from demand uncertainty, a key force shaping market transactions. Relational contracts between firms display trading patterns qualitatively similar to those
within integrated chains but do not achieve the same degree of market assurance. Integration, however, comes at the cost of worse relationships with independent
suppliers. The evidence strongly supports models in which firms boundaries alter temptations to renege on relational contracts and, consequently, the allocation of
resources. Policy implications for export-oriented agricultural chains in developing countries are discussed.