Firm and Market Response to Saving Constraints: Evidence from the Kenyan Dairy Industry

• Departmental Seminar

Date and Location

Thursday, January 21, 2016, 4:10 PM - 5:30 PM
ARE Library Conference Room, 4101 Social Sciences and Humanities

Abstract

This paper documents how saving constraints can spill over into other markets. When producers value saving devices, trustworthy buyers can offer them infrequent payments|a commitment tool|and purchase at a lower price. This affects the nature of competition in the output market. We present a model of this interlinked saving-output market for the case of the Kenyan dairy industry. Multiple data sources, experiments, and a calibration exercise support its microfoundations and predictions concerning: i) producers' demand for infrequent payments; ii) an asymmetry across buyers in the ability to credibly commit to low frequency payments; iii) a segmented market equilibrium where buyers compete by providing either liquidity or saving services to producers; iv) low supply response to price increases. We discuss additional evidence from other contexts, including labor markets, and derive policy implications concerning contract enforcement, financial access, and market structure.