DP11874 Vertical Integration and Relational Contracts: Evidence from the Costa Rica Coffee Chain

Author(s): Rocco Macchiavello, Josepa Miquel-Florensa
Publication Date: February 2017
Keyword(s): Adaptation, Demand Uncertainty, relational contracts, Supply Chain, vertical integration
JEL(s): D23, L14, L22, O12, Q13
Programme Areas: Industrial Organization, International Trade and Regional Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11874

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.