Statistics

Econometrics

Psychology

Mill

Microeconomics

Ecology

Programming language

Endogeneity

Social psychology

Engineering

Economics

Upstream (networking)

Temptation

Business

Mathematics

Biology

Relational contract

Computer science

Construct (python library)

Computer network

Industrial organization

Matching (statistics)

Mechanical engineering

Competition (biology)

The Quarterly Journal of Economics

How does competition affect market outcomes when formal contracts are not enforceable and parties resort to relational contracts? Difficulties with measuring relational contracts and dealing with the endogeneity of competition have frustrated attempts to answer this question. We make progress by studying relational contracts between upstream farmers and downstream mills in Rwanda’s coffee industry. First, we identify salient dimensions of their relational contracts and measure them through an original survey of mills and farmers. Second, we take advantage of an engineering model for the optimal placement of mills to construct an instrument that isolates geographically determined variation in competition. Conditional on the suitability for mills’ placement in the catchment area, we find that mills surrounded by more suitable areas (i) face more competition from other mills, (ii) use fewer relational contracts with farmers, and (iii) exhibit worse performance. An additional competing mill also (iv) reduces the aggregate quantity of coffee supplied to mills by farmers and (v) makes farmers worse off. Competition hampers relational contracts directly by increasing farmers’ temptation to default on the relational contract and indirectly by reducing mills’ profits.

Competition and Relational Contracts in the Rwanda Coffee Chain