Vertical Integration and Relational Contracts: Evidence from Costa Rica's Coffee Chain

Rocco Macchiavello, Josepa Miquel-Florensa

CEPR Discussion Papers 11874

2016

When contracts are incomplete, market trade might be substituted by relational contracts or integration. This paper compares vertical integration and relational contracts between coffee mills and buyers in Costa Rica. Detailed data on transactions between and within firms reveal that integrated trade is shielded from demand uncertainty, a key force shaping market transactions. Relational contracts between firms display trading patterns qualitatively similar to those within integrated chains but do not achieve the same degree of market assurance. Integration, however, comes at the cost of worse relationships with independent suppliers. The evidence strongly supports models in which firms boundaries alter temptations to renege on relational contracts and, consequently, the allocation of resources. Policy implications for export-oriented agricultural chains in developing countries are discussed.

Organizational Behavior, Transaction Costs, Property Rights, Transactional Relationships, Contracts and Reputation, Networks, Firm Organization and Market Structure, Microeconomic Analyses of Economic Development, Agricultural Markets and Marketing, Cooperatives, Agribusiness

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