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Efficient Consumer Altruism and Fair Trade Products

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  • David Reinstein
  • Joon Song

Abstract

Consumers have shown willingness to pay a premium for products labeled as "Fair Trade" and to prefer retailers that are seen as more generous to their suppliers and employees. We define a fair trade product as a bundle of a consumption good and a donation. An altruistic consumer will only choose this bundle over its separate elements if the bundle is less expensive. Thus, for fair trade to be sustainable in a competitive equilibrium, an efficiency must be generated. In general, the first-best level of investment (to reduce the retailer's cost or boosts quality) cannot be achieved when it is non-verifiable. However, the altruism of the consumer facilitates a more efficient contract: by paying the supplier more, the retailer can both extract more consumer surplus and increase the level of contracted investment, while preserving incentive compatibility. We provide empirical and anecdotal evidence for the assumptions and predictions of this model, focusing on the coffee industry.

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File URL: http://hdl.handle.net/10.1111/j.1530-9134.2011.00323.x
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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 21 (2012)
Issue (Month): 1 (03)
Pages: 213-241

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Handle: RePEc:bla:jemstr:v:21:y:2012:i:1:p:213-241

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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  1. Philip Booth & Linda Whetstone, 2007. "Half A Cheer For Fair Trade," Economic Affairs, Wiley Blackwell, vol. 27(2), pages 29-36, 06.
  2. Mark Hayes, 2006. "On the efficiency of fair trade," Review of Social Economy, Taylor & Francis Journals, vol. 64(4), pages 447-468.
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Cited by:
  1. Alexander Kadow, 2011. "The Fair Trade movement:an economic perspective," Working Papers 2011_05, Business School - Economics, University of Glasgow.
  2. Leonardo Becchetti & Pierluigi Conzo & Giuseppina Gianfreda, 2009. "Market access, organic farming and productivity: the determinants of creation of economic value on a sample of Fair Trade affiliated Thai farmers," Econometica Working Papers wp05, Econometica.
  3. Leonardo Becchetti, 2011. "Voting with the Wallet," Econometica Working Papers wp33, Econometica.
  4. Claire Chambolle & Sylvaine Poret, 2013. "When fairtrade contracts for some are profitable for others," Working Papers 168378, Institut National de la Recherche Agronomique, France.
  5. Hannes Koppel & Günther Schulze, 2013. "The Importance of the Indirect Transfer Mechanism for Consumer Willingness to Pay for Fair Trade Products—Evidence from a Natural Field Experiment," Journal of Consumer Policy, Springer, vol. 36(4), pages 369-387, December.

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