Contracting Institutions, Agro-food Trade and Product Quality

Abstract

The agro-food sector has experienced a profound transformation of contractual arrangements along the value chain, coinciding with important technological innovations and product quality upgrading. Our understanding of the impact that this transformation has had on trade flows in the agricultural sector is very limited. In particular, we have limited knowledge about the extent to which the patterns in agro-food trade have been driven by the quality of contractual institutions. Using existing measures which capture the sensitivity of agro-food products to contractual imperfections, we show that countries with better contract enforcement specialise in the production of food which requires higher level of relationship-specific investments. We also find that countries with better contracting institutions and producing contract-intensive goods specialise in exporting high quality foods. In addition, we show that the quality of contracting institutions might importantly affect the process of product quality upgrading.