This paper provides evidence on the importance of reputation in the context of the Kenyan rose export sector. A model of reputation and relational contracting is developed and tested. A seller’s reputation is defined by buyer’s beliefs about seller’s reliability. The authors show that:
due to lack of enforcement, the volume of trade is constrained by the value of the relationship
the value of the relationship increases with the age of the relationship;
during an exogenous negative supply shock deliveries are an inverted-U shaped function of relationship’s age. Models exclusively focusing on enforcement or insurance considerations cannot account for the evidence.
Macchiavello, R.; Morjaria, A. The Value of Relationships: Evidence from a Supply Shock to Kenyan Rose Exports. American Economic Review (2015) 105 (9) 2911-2945. [DOI: 10.1257/aer.20120141]