Do Search Frictions Compound Problems of Relational Contracting

Abstract

We estimate the effect of search frictions on Kenyan farmers' decisions to supply French beans for export under contract. This paper has two main contributions. First, we build on the competitive wage models of Moen (1997) and Mortensen and Wright (2002) to include imperfect contract enforcement. Second, we employ two novel empirical methodologies to test our model using data from Kenya's French bean export industry. The first methodology measures search frictions based on the spatial density of firms and farmers in the market. The second uses preferences measured in a choice experiment to quantify the impact of search frictions on farmers entry and exit decisions under different contract enforcement scenarios. We find that search frictions are present in the market which primarily limits farmers' abilities to match with potential buyers but not vice versa. Examining the two component submarkets of the French bean export market, we find that search frictions are a potential barrier to entry for the fresh submarket and may be a factor in farmers' exit decision from the processed market. Lastly, we find search frictions are a potential barrier in areas where buyers are perceived as more reliable, suggesting a potential trade-off for policymakers depending on whether they design an intervention to target contract enforcement or search frictions. These findings are important for designing more effective programs to connect small-scale producers to French bean markets.