Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence
42 Pages Posted: 24 Apr 2017 Last revised: 11 Oct 2017
Date Written: October 10, 2017
In addressing the product adoption puzzle, the literature has focused primarily on demand-side barriers. In this paper, we attempt to address frictions on the supply side. We model the relationship between a producer or distributor and its vendors, where credit constraints and contract enforceability present challenges for distribution. We show that providing vendors with an initial endowment of the good and the option to buy additional units at a fixed price is an optimal way in which to overcome these frictions. The arrangement is straightforward to implement and is optimal both for profit-maximizing firms and non-profit organizations with limited resources. We test the arrangement using a field experiment in rural Uganda. We find that the optimal arrangement increases sales by 3-4 times compared to a standard contract. However, the rate of sales growth was lower than predicted by the model. Surveys suggest that an unwillingness to extend credit to their customers and a lack of access to a reliable savings technology were the primary impediments to growth.
Keywords: Product Adoption Puzzle, Relational Contracting, Dynamic Incentives
JEL Classification: I15, O1, D86, D23
Suggested Citation: Suggested Citation