DP9531 The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports

Author(s): Rocco Macchiavello, Ameet Morjaria
Publication Date: June 2013
Keyword(s): exports, relational contracts, reputation
JEL(s): C73, D23, L14, O12
Programme Areas: Industrial Organization, International Trade and Regional Economics, Development Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9531

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 focusing on enforcement or insurance considerations cannot account for the evidence.