The Value of Relational Contracting: Evidence from China’s Vegetable Wholesale Markets

• Agricultural Economics Workshop

Date and Location

Thursday, May 27, 2021, 4:10 PM - 5:30 PM
Online Meeting, Zoom

Abstract

Informal agreements sustained by the value of future relationships are known as relational contracts. They represent an important but little understood form of vertical coordination in agricultural supply chains. Why are these relationships established, what are the benefits to trading partners from relational trading, and how are these informal agreements sustained? Difficulties with measuring relational practices have hindered attempts to answer these questions. Using detailed transaction-level data for a large wholesale vegetable market in China, this paper conducts one of the first empirical analyses of informal trading relationships in a domestic agricultural supply chain. Despite operating in a seemingly competitive, spot-market environment, I find that many vegetable traders establish stable trading relationships in which they repeatedly transact with the same individual. I find that sellers tend to charge their relational buyers a higher price than is charged to idiosyncratic buyers. Results also indicate that buyers pay this price premium in exchange for greater assuredness in supply – they are rationed less frequently and less severely by virtue of having stable trading partners. In addition, both relational buyers and sellers obtain some protection against price risk. Price changes in response to supply fluctuations are less severe in relational transactions, risk-sharing benefits appear greater in more intense relationships.