Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence

Abstract

A large literature examines demand-side barriers to product adoption. In this paper, we examine supply-side barriers in a setting with limited contract enforcement. We model the relationship between a distributor and its credit-constrained vendors. We show that the optimal self-enforcing arrangement can be implemented by providing vendors with a line of credit and the option to buy additional units at a fixed price. Moreover, the structure of this arrangement is optimal both for profit-maximizing firms and for non-profit organizations with limited resources. We test the arrangement using a field experiment in rural Uganda. We find that the model-implied optimal arrangement increased distribution significantly compared to a standard contract. However, growth was lower than predicted by the model because vendors (i) were unwilling to extend credit to customers, and (ii) did not have access to a reliable savings technology. We discuss several recent technological innovations that help to overcome both of these challenges.

Keywords: Product Adoption Puzzle, Relational Contracting, Dynamic Incentives

JEL Classification: I15, O1, D86, D23