Relationships on the Rocks: Contract Evolution in a Market for Ice

Journal Article
Published on 1 January 2021

Working paper available through PEDL. Article forthcoming.

Abstract

Firms use relational contracts to support repeated trade. Do these informal agreements evolve in response to market conditions? In a market for ice, firms reestablish relationships on new terms when a prior agreement breaks down. Using transaction data, Ghani and Reed (forthcoming) show that ice retailers prioritize deliveries to loyal buyers - fishing firms - when supply from the monopolistic manufacturer is scarce. After an upstream shock to competition increases supply, repeated trade lapses, threatening retailers' positions. Incumbent retailers establish a new agreement expanding trade credit to loyal buyers, which impedes new retailer entry. Upstream competition also increases downstream firms' productivity and lowers consumer fish prices.

Authors

Tarek Ghani

Washington University in St Louis

Tristan Reed

World Bank