“Competition and Relational Contracts: Evidence from Rwanda’s Coffee Mills”

Next Wednesday, November 5th, at 2pm, the NOVAFRICA Center welcomes Ameet Morjaria, from Harvard University to present his work about competition and relational Contracts.

Rocco Macchiavello and Ameet Morjaria.

We study the effects of competition in the procurement of raw materials on relational contracts (RC) using Rwanda’s coffee sector as a case study. We measure several dimensions of RC between mills and farmers and find i) dispersion across mills in the use of RC, ii) RC practices are correlated with each other, iii) RC are correlated with mill’s capacity utilization and unit processing costs. We develop a model highlighting the relationship between competition, RC, mill and farmer outcomes. We estimate an engineering model for the optimal placement of mills to instrument for competition to test the predictions of the model. Competition reduces RC, lowers utilization and increases mill’s processing costs. As a result of RC breakdown, we can reject a positive effect of competition on farmers, including increases in prices of input. The evidence emphasizes the importance of promoting contractual enforcement in agricultural value chains and rationalizes policies, such as zoning regulations, monopsony licensing and other entry restrictions, commonly observed in the developing world.

For further information see here.