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.