Optimal Arrangements for Distribution in Developing Markets: Theory and Evidence
47 Pages Posted: 24 Apr 2017 Last revised: 17 May 2018
Date Written: May 14, 2018
A large literature examines demand-side barriers to product adoption. In this paper, we examine frictions on the supply side. We model the relationship between a producer and its vendors, which features credit constraints and limited contract enforcement. We solve for the optimal self-enforcing arrangement and show that it 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 the 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 due to (i) an unwillingness to extend credit to customers and (ii) the lack of a reliable savings technology.
Keywords: Product Adoption Puzzle, Relational Contracting, Dynamic Incentives
JEL Classification: I15, O1, D86, D23
Suggested Citation: Suggested Citation