Last updated on September 6, 2015
Since I had a post discussing contract farming and agricultural value chains yesterday, I thought I should also mention this new article (gated; click here for an older, ungated version) by Rocco Macchiavello and Ameet Morjaria published in the latest issue of the American Economic Review, titled “The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports.”
Here is the abstract:
This paper provides evidence on the importance of reputation in the context of the Kenyan rose export sector. A model of reputation and relational contracting is developed and tested. A seller’s reputation is defined by buyer’s beliefs about seller’s reliability. We show that (i) due to lack of enforcement, the volume of trade is constrained by the value of the relationship; (ii) the value of the relationship increases with the age of the relationship; and (iii) during an exogenous negative supply shock deliveries are an inverted-U shaped function of relationship’s age. Models exclusively focusing on enforcement or insurance considerations cannot account for the evidence.
I suppose the trust factor is what develops in the relationship between buyer and seller when the reliability is established. Kenyan flowers are big business. But even small scale weekly delivery of vegetables to a buyer, say a boarding school, need this reliability factor and without it no trust develops between buyer and seller. Where it does develop a profitable business for the seller ensues. Those that do build trust by reliability seem to have a more long term view of their business than those who are unreliable and let down the buyer casing him a supply shock. They also seem to have more realistic price expectations for their produce than the unreliable seller.