Strategic default in the international coffee market

Blouin, Arthur and Macchiavello, Rocco ORCID: 0009-0007-5465-3153 (2019) Strategic default in the international coffee market. Quarterly Journal of Economics, 134 (2). 895 - 951. ISSN 0033-5533

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Abstract

This article studies strategic default on forward sale contracts in the international coffee market. To test for strategic default, we construct contract-specific measures of unanticipated changes in market conditions by comparing spot prices at maturity with the relevant futures prices at the contracting date. Unanticipated rises in market prices increase defaults on fixed-price contracts but not on price-indexed ones. We isolate strategic default by focusing on unanticipated rises at the time of delivery after production decisions are sunk and suppliers have been paid. Estimates suggest that roughly half of the observed defaults are strategic. We model how strategic default introduces a trade-off between insurance and counterparty risk: relative to indexed contracts, fixed-price contracts insure against price swings but create incentives to default when market conditions change. A model calibration suggests that the possibility of strategic default causes 15.8% average losses in output, significant dispersion in the marginal product of capital, and sizable negative externalities on supplying farmers.

Item Type:	Article
Official URL:	https://academic.oup.com/qje
Additional Information:	© 2019 The Authors
Divisions:	Management
Subjects:	H Social Sciences > HC Economic History and Conditions
JEL classification:	L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships; Contracts and Reputation; Networks G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Date Deposited:	27 Jun 2019 16:06
Last Modified:	01 Nov 2024 05:32
URI:	http://eprints.lse.ac.uk/id/eprint/101080

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