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Title: Vertical Integration and Relational Contracts: Evidence from the Costa Rica Coffee Chain

Author(s): Rocco Macchiavello and Josepa Miquel-Florensa

Publication Date: February 2017

Keyword(s): Adaptation, Demand Uncertainty, relational contracts, Supply Chain and vertical integration

Programme Area(s): Development Economics, Industrial Organization and International Trade and Regional Economics

Abstract: This paper compares integrated firms, long-term relationships and markets, and how they adapt to shocks in the Costa Rican coffee chain. The industry is characterised by significant uncertainty. Supply failures responses to unanticipated increases in reference prices reveal that integration and relationships reduce opportunism. Trade volumes responses to weather-induced increases in supply reveal that relationships provide demand assurance, although less than integration does. This benefit of integration is offset by costs when trading outside of the integrated chain. The evidence supports models in which firms boundaries alter temptations to renege on relational contracts and, consequently, the allocation of resources.

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Bibliographic Reference

Macchiavello, R and Miquel-Florensa, J. 2017. 'Vertical Integration and Relational Contracts: Evidence from the Costa Rica Coffee Chain'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11874