Description:

Lauren Bergquist (Yale University): “Quality Incentives and Upgrading in Uganda’s Coffee Supply Chain” (with Jie Bai, Ameet Morjaria, Russell Morton, and Yulu Tang)

Abstract: Quality upgrading to attain export premia is a key development strategy in many low and middle-income countries (LMICs). However, in supply chains in LMICs, producers often do not sell directly to the world market; instead, they sell through multiple layers of domestic intermediation. We study how these chains of intermediation affect incentives for quality production in the context of the Uganda coffee supply chain. We first map out the supply chain linking farm gate and export gate, documenting that coffee changes hands, on average, two times before reaching export markets. Next, leveraging high-frequency transaction-level data throughout the supply chain, including prices and lab quality assessments, we show that quality premium diminishes upstream. We build a model highlighting two key economic mechanisms that may drive these diminished quality premia upstream. First, barriers to entry to high-quality intermediation enable greater buyer power in the high-quality segment; resulting differential markdowns squeeze the quality premium upstream. Second, both producers and intermediaries engage in quality investments, with the degree of substitutability of these investments mediating the downstream’s demand for high quality from the upstream. Both mechanisms have distributional implications for farmer surplus, but only the former dampens aggregate quality production.  To separately quantify the two, we conduct an experiment that offers randomized coffee production contracts to induce quality-specific demand shocks throughout the supply chain to identify the key cost parameters of our model. We use the estimated model to examine the efficiency implications and distributional consequences of market power and productive substitutability, as well as how they interact to affect quality production and surplus distribution along the chain. Finally, we apply the model to investigate policy counterfactuals.