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Efficient Consumer Altruism and Fair Trade

  • David Reinstein


  • Joon Song


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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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 651.

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Date of creation: 27 Mar 2008
Date of revision:
Handle: RePEc:esx:essedp:651
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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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