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Competition and relational contracts in the Rwanda coffee Chain

Macchiavello, Rocco and Morjaria, Ameet (2020) Competition and relational contracts in the Rwanda coffee Chain. Quarterly Journal of Economics. ISSN 0033-5533 (In Press)

[img] Text (Competition and Relational Contracts in the Rwanda Coffee Chain∗) - Accepted Version
Pending embargo until 1 January 2100.

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How does competition affect market outcomes when formal contracts are not enforceable and parties’ resort to relational contracts? Difficulties with measuring relational contracts and dealing with the endogeneity of competition have frustrated attempts to answer this question. We make progress by studying relational contracts between upstream farmers and downstream mills in Rwanda’s coffee industry. First, we identify salient dimensions of their relational contracts and measure them through an original survey of mills and farmers. Second, we take advantage of an engineering model for the optimal placement of mills to construct an instrument that isolates geographically determined variation in competition. Conditional on the suitability for mills’ placement within the catchment area, we find that mills surrounded by more suitable areas: (i) face more competition from other mills; (ii) use fewer relational contracts with farmers; and (iii) exhibit worse performance. An additional competing mill also (iv) reduces the aggregate quantity of coffee supplied to mills by farmers and (v) makes farmers worse off. Competition hampers relational contracts directly by increasing farmers’ temptation to default on the relational contract and indirectly by reducing mill’s profits.

Item Type: Article
Divisions: Management
Date Deposited: 26 Nov 2020 10:36
Last Modified: 23 Dec 2020 00:26

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