Competition on Agricultural Markets and Quality of Smallholder Supply: The Role of Relational Contracting and Input Provision by Traders

This paper analyzes how market power by traders on local agricultural spot markets affects investment in crop quality by smallholders in a context with “imperfect institutions” and with incomplete input markets. When local markets become more competitive, fewer farmers are included in relational contracting with traders, and farmers who remain in such relationships receive less support from traders. We document empirical evidence from local wheat markets in Ethiopia that is consistent with the theory.