Rich Consumers and Poor Producers: Quality and Rent Distribution in Global Value Chains

TLDR: In this paper, the authors analyze under which conditions the introduction of quality standards in global value chains may benefit poor producers in developing countries, taking explicitly into account key characteristics of these value chains.

Abstract: Quality standards are rapidly gaining importance as a result of increasingly globalized trade. Rich country quality requirements are said to have detrimental effects on poor producers in developing countries because they would introduce new trade barriers, prevent small and poor producers from participating in high quality supply chains, and allow multinationals to extract rents. We analyze under which conditions the introduction of quality standards in global value chains may benefit poor producers in developing countries, taking explicitly into account key characteristics of these value chains. We investigate the effects of competition and development and discuss a series of policy implications.

Figures

Figure 1. Game tree with various holdup opportunities

Figure 2. Surplus sharing under holdup

Figure 3. Enforcement mechanism choice and surplus sharing; (a) high M, (b) low M.

Full text

IFPRI Discussion Paper 00932
November 2009
Rich Consumers and Poor Producers
Quality and Rent Distribution in Global Value Chains
Johan F.M. Swinnen
Anneleen Vandeplas
New Delhi Office

INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE
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United Kingdom, the United States, and the World Bank.
AUTHORS
Johan F.M. Swinnen, University of Leuven
Professor of Development Economics and Director, LICOS-Centre for Institutions and Economic
Performance and Department of Economics
Anneleen Vandeplas, University of Leuven
PhD Fellow, Research Foundation-Flanders and Researcher, LICOS- Centre for Institutions and
Economic Performance and Department of Economics
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1
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2
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iii
Contents
Acknowledgments v
Abstract vi
1. Introduction 1
2. The Model 4
3. Endogenous Third Party Enforcement 9
4. The Impact of Competition 12
5. The Impact of Development 14
6. Conclusion 17
References 18

iv
List of Figures
1. Game tree with various holdup opportunities 5
2. Surplus sharing under holdup 7
3. Enforcement mechanism choice and surplus sharing; (a) high M, (b) low M. 10

v
ACKNOWLEDGMENTS
The authors are grateful to Patrick Legros, Carmen Li, and seminar participants in Leuven, Rome (FAO),
New Delhi (IFPRI), Barcelona (EAAE) and Brunel (CEDI), and to an anonymous referee at IFPRI for
comments on earlier versions of the paper.
This project was supported by the Katholieke Universiteit Leuven and the Research Foundation-
Flanders (FWO).

Frequently asked questions

Q1. What is the effect of third party enforcement?

Where cheaper third party enforcement will substitute for efficiency premiums, the distribution of the contract surplus will also be affected. 

Q2. What is the effect of third party enforcement on the use of pure output contracts?

If third party enforcement is binding, development will only have a positive (or zero) effect through an increased opportunity cost of labor ( l ), as opportunistic behavior by the supplier is ruled out. 

Q3. What is the role of smallholders in the development of Latin America?

Contract farming, smallholders, and rural development in Latin America: the organization of agroprocessing firms and the scale of outgrower production. 

Q4. What is the effect of development on the emergence and distribution of interlinked contracts?

if enforcement becomes less costly with the emergence and better functioning of formal institutions, this will affect the emergence and distributional effects of interlinked contracts. 

Q5. What is the effect of factor market imperfections on the value of inputs?

More precisely, the authors show that if factor market imperfections induce interlinked contract arrangements, the extent of inefficient separation (absence of socially efficient contracting) is increasing in the enforcement costs and in the value of specific inputs required for high value production. 

Q6. What is the effect of competition between buyers?

With (increased) competition between buyers, input provision may be unsustainable, and contracting may break down although it would be socially efficient. 

Q7. What is the effect of competition between buyers on the reputation of the supplier?

In terms of their model, competition between buyers will reduce the supplier’s reputation cost φf from breach of contract (∂φf/∂Ψ < 0). 

Q8. How can a supplier increase his income from the contract?

As long as third party enforcement is too costly, this will increase the supplier’s income from the contract, Y. Development can change the organization of agricultural production even more dramatically, by giving suppliers direct access to inputs. 

Q9. What is the equivalent to stating that when renegotiating, he suffers a?

This is equivalent to stating that when renegotiating, he suffers a reputation loss of φp which is high enough to discourage him from opportunistic behavior. 

Q10. What is the general effect of development on formal enforcement institutions?

It is generally observed that formal enforcement institutions become more effective with development (Djankov et al. 2003; North 1990).