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Competition and Relational Contracts in the Rwanda Coffee Chain

Author

Listed:
  • Rocco Macchiavello
  • Ameet Morjaria

Abstract

How does competition affect market outcomes when formal contracts are not enforceable and parties resort to relational contracts? Difficulties with measuring relational contracts and dealing with the endogeneity of competition have frustrated attempts to answer this question. We make progress by studying relational contracts between upstream farmers and downstream mills in Rwanda’s coffee industry. First, we identify salient dimensions of their relational contracts and measure them through an original survey of mills and farmers. Second, we take advantage of an engineering model for the optimal placement of mills to construct an instrument that isolates geographically determined variation in competition. Conditional on the suitability for mills’ placement in the catchment area, we find that mills surrounded by more suitable areas (i) face more competition from other mills, (ii) use fewer relational contracts with farmers, and (iii) exhibit worse performance. An additional competing mill also (iv) reduces the aggregate quantity of coffee supplied to mills by farmers and (v) makes farmers worse off. Competition hampers relational contracts directly by increasing farmers’ temptation to default on the relational contract and indirectly by reducing mills’ profits.

Suggested Citation

  • Rocco Macchiavello & Ameet Morjaria, 2021. "Competition and Relational Contracts in the Rwanda Coffee Chain," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(2), pages 1089-1143.
    • Handle: RePEc:oup:qjecon:v:136:y:2021:i:2:p:1089-1143.
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    File URL: http://hdl.handle.net/10.1093/qje/qjaa048
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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness

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