Events

Dr. Rocco Macchiavello
Associate Professor
London School of Economics

This paper studies the Sustainable Quality Program in Colombia – a quality upgrading program implemented on behalf of a multinational coffee buyer. We model the program as a vertical restraint sustained by a relational contract between the Exporter and the Buyer. The higher price premium paid by the buyer at the export gate allows the Exporter to overcome both contracting problems and monopsony power vis a’ vis smallholder farmers. We estimate the reduced-form impact of the program’s roll out on exports and farmers’ investments and find that the program induced significant quality upgrading. We leverage the reduced-form estimates to structurally estimate a dynamic model of farmers’ investment to quantify the gains from the program and perform counterfactuals. The Program increased surplus along the domestic chain by ≈28% — with eligible farmers earning 14% higher profits and keeping around half of the gains. Counterfactual analysis reveals that the vertical restraint is essential to achieve these gains. The paper highlights a novel mechanism through which foreign buyers’ relational sourcing strategies can increase efficiency in developing countries.