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Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence

Author

Listed:
  • William Fuchs
  • Brett Green
  • David Levine

Abstract

A large literature examines demand-side barriers to product adoption. In this paper, we examine supply-side barriers in a setting with limited contract enforcement. We model the relationship between a distributor and its credit-constrained vendors. We show that the optimal self-enforcing arrangement can be implemented by providing vendors with a line of credit and the option to buy additional units at a fixed price. Moreover, the structure of this arrangement is optimal both for profit-maximizing firms and for nonprofit organizations with limited resources. We test the arrangement using a field experiment in rural Uganda. We find that the model-implied optimal arrangement increased distribution significantly compared to a standard contract. However, growth was lower than predicted by the model because vendors were unwilling to extend credit to customers and did not have access to a reliable savings technology. We discuss several recent technological innovations that help to overcome both of these challenges.

Suggested Citation

  • William Fuchs & Brett Green & David Levine, 2022. "Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 14(1), pages 411-450, February.
    • Handle: RePEc:aea:aejmic:v:14:y:2022:i:1:p:411-50
    DOI: 10.1257/mic.20190085
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    Citations

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    Cited by:

    1. Christian Fischer‐Thöne, 2023. "Optimal Payment Contracts In Trade Relationships," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(4), pages 1649-1683, November.

    More about this item

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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