Vertical Integration and Relational Contracts: Evidence from the Costa Rica Coffee Chain

71 Pages Posted: 2 Mar 2017

See all articles by Rocco Macchiavello

Rocco Macchiavello

University of Oxford - Nuffield College of Medicine; Centre for Economic Policy Research (CEPR)

Josepa Miquel-Florensa

University of Toulouse 1 - Toulouse School of Economics (TSE)

Date Written: February 2017

Abstract

This paper compares integrated firms, long-term relationships and markets, and how they adapt to shocks in the Costa Rican coffee chain. The industry is characterised by significant uncertainty. Supply failures responses to unanticipated increases in reference prices reveal that integration and relationships reduce opportunism. Trade volumes responses to weather-induced increases in supply reveal that relationships provide demand assurance, although less than integration does. This benefit of integration is offset by costs when trading outside of the integrated chain. The evidence supports models in which firms boundaries alter temptations to renege on relational contracts and, consequently, the allocation of resources.

Keywords: Adaptation, Demand Uncertainty, relational contracts, Supply Chain, vertical integration

JEL Classification: D23, L14, L22, O12, Q13

Suggested Citation

Macchiavello, Rocco and Miquel-Florensa, Josepa, Vertical Integration and Relational Contracts: Evidence from the Costa Rica Coffee Chain (February 2017). CEPR Discussion Paper No. DP11874, Available at SSRN: https://ssrn.com/abstract=2924734

Rocco Macchiavello (Contact Author)

University of Oxford - Nuffield College of Medicine ( email )

New Road
Oxford, OX1 1NF
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Josepa Miquel-Florensa

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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