Research
Working Papers
Value Creation and Value Capture in Indian Garment Sector Bargaining
Low prices paid by large exporters to their many small suppliers raise concerns about unequal distribution of gains from exporting. However, when input or complementary markets (e.g., insurance, credit) function poorly, multifaceted vertical contracts govern prices. Consequently, prices incorporate more than standard oligopsony markdowns. This paper quantifies how prices reflect two contract features that emerge in such settings. First, contracts create surplus by mitigating frictions (e.g., providing insurance or trade credit); then, low prices reflect the buyer’s share of surplus created. Second, buyers reduce sourcing from external suppliers through partial vertical integration, enabling surplus capture through replacement threats with in-house production. While buyer power both over surplus creation and from surplus capture can lower prices, their distributional implications differ—only creation aligns incentives for contracts to mitigate frictions. I estimate a structural bargaining model using proprietary data on the universe of fabric purchases by a large Indian garment exporter. The model shows that buyer power over surplus creation from insurance-like contract terms, not from surplus capture, explains low prices; the buyer retains ~60% of gains. Counterfactuals illustrate that introducing a profit-insurance product substantially increases prices paid to small risk-averse suppliers, whereas increasing buyer competition has limited effects.