Research
Working Papers
Value Creation and Value Capture in Indian Garment Sector Bargaining
This paper examines creation and distribution of surplus in export-oriented low- and middle-income country (LMIC) domestic supply chains. While exporting can enhance growth and productivity, low prices paid to small suppliers raise concerns that gains accrue to the large exporters (buyers domestically). I quantify how prices reflect two features that arise when spot markets function poorly. First, transactions occur in bargained agreements that create surplus by mitigating frictions in the market for the input or auxiliary markets (e.g., risk and credit); many agreements incorporate quantity stability, reducing profit variability. Second, buyers source some inputs in-house, potentially enabling surplus capture from threats to replace external suppliers with in-house production. Using novel transaction data on the universe of fabric purchases from ~500 suppliers by a major Indian garment manufacturer, I estimate a structural model to decompose discounts into: i) surplus creation from quantity stability and other insurance-like terms and ii) capture from replacement threats with in-house production. Model estimates show that discounts reflect surplus creation rather than capture; difference-in-differences estimates yield consistent findings. Counterfactual analyses highlight that increasing buyer competition has limited effects on prices paid to small risk-averse suppliers, but introducing profit insurance increases prices.