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The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports

  • Macchiavello, Rocco

    (Department of Economics, University of Warwick)

  • Morjaria, Ameet

    (World Bank)

This paper provides evidence on the importance of reputation, intended as beliefs buyers hold about seller’s reliability, in the context of the Kenyan rose export sector. A model of reputation and relational contracting is developed and tested. We show that 1) the value of the relationship increases with the age of the relationship; 2) during an exogenous negative supply shock sellers prioritize relationships consistently with the predictions of the model; and 3) reliability at the time of the shock positively correlates with future survival and relationship value. Models exclusively focussing on enforcement or insurance considerations cannot account for the evidence. JEL classification: C73 ; D23 ; L14 ; O12

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2013/twerp_1032_macchiavello.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 1032.

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Date of creation: 2013
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Handle: RePEc:wrk:warwec:1032
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  1. Fafchamps, Marcel, 2000. "Ethnicity and credit in African manufacturing," Journal of Development Economics, Elsevier, vol. 61(1), pages 205-235, February.
  2. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2007. "Market Entry Costs, Producer Heterogeneity, and Export Dynamics," Econometrica, Econometric Society, vol. 75(3), pages 837-873, 05.
  3. Luis Araujo & Emanuel Ornelas, 2005. "Trust-Based Trade," IBMEC RJ Economics Discussion Papers 2005-08, Economics Research Group, IBMEC Business School - Rio de Janeiro.
  4. Marcel Fafchamps, 2004. "Market Institutions in Sub-Saharan Africa: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262062364, June.
  5. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. William Fuchs, 2007. "Contracting with Repeated Moral Hazard and Private Evaluations," American Economic Review, American Economic Association, vol. 97(4), pages 1432-1448, September.
  7. Jonathan Levin, 2000. "Relational Incentive Contracts," Working Papers 01002, Stanford University, Department of Economics.
  8. Pranab K. Bardhan, 1983. "Labor-tying in a Poor Agrarian Economy: A Theoretical and Empirical Analysis," The Quarterly Journal of Economics, Oxford University Press, vol. 98(3), pages 501-514.
  9. Gil, Ricard & Marion, Justin, 2009. "The Role of Repeated Interactions, Self-Enforcing Agreements and Relational [Sub]Contracting: Evidence from California Highway Procurement Auctions," University of California Transportation Center, Working Papers qt03c1w4d2, University of California Transportation Center.
  10. Ksoll, Christopher & Macchiavello, Rocco & Morjaria, Ameet, 2010. "The Effect of Ethnic Violence on an Export-Oriented Industry," CEPR Discussion Papers 8074, C.E.P.R. Discussion Papers.
  11. John McMillan & Christopher Woodruff, 1998. "Interfirm Relationships and Informal Credit in Vietnam," William Davidson Institute Working Papers Series 132, William Davidson Institute at the University of Michigan.
  12. Andrabi, Tahir & Ghatak, Maitreesh & Khwaja, Asim Ijaz, 2006. "Subcontractors for tractors: Theory and evidence on flexible specialization, supplier selection, and contracting," Journal of Development Economics, Elsevier, vol. 79(2), pages 273-302, April.
  13. Macchiavello, Rocco, 2010. "Development Uncorked: Reputation Acquisition in the New Market for Chilean Wines in the UK," CEPR Discussion Papers 7698, C.E.P.R. Discussion Papers.
  14. Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, Oxford University Press, vol. 98(4), pages 659-679.
  15. repec:oup:restud:v:55:y:1988:i:4:p:541-54 is not listed on IDEAS
  16. Marcel Fafchamps, 2006. "Spontaneous Markets, Networks, and Social Capital: Lessons from Africa," Economics Series Working Papers GPRG-WPS-058, University of Oxford, Department of Economics.
  17. repec:oup:restud:v:63:y:1996:i:3:p:491-519 is not listed on IDEAS
  18. George Baker & Robert Gibbons & Kevin J. Murphy, 2002. "Relational Contracts and the Theory of the Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 39-84.
  19. Marina Halac, 2012. "Relational Contracts and the Value of Relationships," American Economic Review, American Economic Association, vol. 102(2), pages 750-79, April.
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