Efficient Consumer Altruism and Fair Trade Products

Posted: 19 Jan 2012

See all articles by David Reinstein

David Reinstein

University of Essex

Joon Song

Sungkyunkwan University - Department of Economics

Date Written: Spring 2012

Abstract

Consumers have shown a willingness to pay a premium for products labeled as “FT” and a preference for retailers that are seen to be more generous to their suppliers/employees. A FT product is essentially a bundle of a base product and a donation to the supplier (e.g., a coffee farmer). An altruistic rational consumer will only choose this bundle if doing so is less expensive than buying the base product and making a direct donation. For FT to be sustainable either in a competitive equilibrium or in a monopolistic environment this bundling must yield an efficiency. This efficiency is generated in the following context. A supplier’s investment reduces the retailer’s cost or boosts the final product’s quality, but this investment is not immediately observable and cannot be enforced, hence there exists a moral hazard problem. In this environment, the altruism of the consumer can facilitate a more efficient contract: by paying the supplier more the retailer can both extract more consumer surplus and increase the level of contracted investment, while preserving the supplier’s incentive compatibility constraint. We assess our model in the context of the coffee industry.

Suggested Citation

Reinstein, David and Song, Joon, Efficient Consumer Altruism and Fair Trade Products (Spring 2012). Journal of Economics & Management Strategy, Vol. 21, Issue 1, pp. 213-241, 2012. Available at SSRN: https://ssrn.com/abstract=1987966 or http://dx.doi.org/10.1111/j.1530-9134.2011.00323.x

David Reinstein (Contact Author)

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Joon Song

Sungkyunkwan University - Department of Economics ( email )

110-745 Seoul
Korea

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