DP10952 Firm and Market Response to Saving Constraints: Evidence from the Kenyan Dairy Industry

Author(s): Lorenzo Casaburi, Rocco Macchiavello
Publication Date: November 2015
Keyword(s): Agricultural Markets, Competition, Imperfect Contract Enforcement, Interlinked Transactions, Saving Constraints, Trust
JEL(s): L22, O12, O16, Q13
Programme Areas: Industrial Organization, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10952

This paper documents how saving constraints can spill over into other markets. When producers value saving devices, trustworthy buyers can offer them infrequent payments - a commitment tool - and purchase at a lower price. This affects the nature of competition in the output market. We present a model of this interlinked saving-output market for the case of the Kenyan dairy industry. Multiple data sources, experiments, and a calibration exercise support its microfoundations and predictions concerning: i) producers' demand for infrequent payments; ii) an asymmetry across buyers in the ability to credibly commit to low frequency payments; iii) a segmented market equilibrium where buyers compete by providing either liquidity or saving services to producers; iv) low supply response to price increases. We discuss additional evidence from other contexts, including labor markets, and derive policy implications concerning contract enforcement, financial access, and market structure.