Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence

47 Pages Posted: 24 Apr 2017 Last revised: 29 May 2020

See all articles by William Fuchs

William Fuchs

University of Texas at Austin - Department of Finance; Universidad Carlos III de Madrid - Department of Economics

Brett S. Green

Washington University in St. Louis - John M. Olin Business School

David I. Levine

University of California, Berkeley - Economic Analysis & Policy Group

Date Written: May 21, 2020

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

Suggested Citation

Fuchs, William Martin and Green, Brett S. and Levine, David Ian, Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence (May 21, 2020). Available at SSRN: https://ssrn.com/abstract=2957288 or http://dx.doi.org/10.2139/ssrn.2957288

William Martin Fuchs

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

Brett S. Green (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

David Ian 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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