Search Costs and Relational Contracts: The Impact of a Digital Phonebook on Small Business Supply Chains

• Development Workshop

Date and Location

Tuesday, October 27, 2020, 4:10 PM - 5:30 PM
933 988 20491, online Zoom

Abstract

Information frictions can be substantial in rural markets in developing countries and can raise the cost of searching for market information. This includes search frictions associated with learning about goods and services offered by numerous suppliers dispersed along urban-to-rural supply chains. I investigate whether lowering search costs for small firms in rural Tanzania decreases information frictions and changes incentives to engage in relational contracting with suppliers and customers. Using a randomized experiment of 500 small firms, I study the impact of a digital phonebook that lowers the cost of accessing new business and customer networks. Participating firms are split into a control and treatment group with two variations: 1) a phonebook listing that is visible to upstream suppliers in urban areas, and 2) a phonebook listing that is visible to downstream customers in rural areas. I find that treated firms increase relational contracting with their suppliers and decrease it with their customers. Yet, there is no strong evidence that the number of new customers or suppliers increases. It suggests that being listed in the directory caused firms to update their valuation of relational contracts and respond by negotiating better terms with suppliers and customers.