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Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence

42 Pages Posted: 24 Apr 2017 Last revised: 11 Oct 2017

William Fuchs

UT Austin ; UC3M

Brett S. Green

University of California, Berkeley - Haas School of Business

David I. Levine

University of California, Berkeley - Economic Analysis & Policy Group

Date Written: October 10, 2017

Abstract

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

Fuchs, William and Green, Brett S. and Levine, David I., Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence (October 10, 2017). Available at SSRN: https://ssrn.com/abstract=2957288 or http://dx.doi.org/10.2139/ssrn.2957288

William Fuchs

UT Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States

UC3M ( email )

Calle Madrid 126
Getafe, 28903
Spain

Brett Green (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

2220 Piedmont Avenue
Berkeley, CA ca 94720
United States
5105759980 (Phone)

HOME PAGE: http://faculty.haas.berkeley.edu/bgreen/

David Levine

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-1697 (Phone)
510-643-1420 (Fax)

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