Research
Working Papers
Value Creation and Value Capture in Indian Garment Sector Bargaining
This paper examines how prices along export-oriented low- and middle-income country (LMIC) supply chains reflect surplus creation versus capture. While exporting can enhance growth, low prices paid by large exporters to their small suppliers raise concerns that gains accrue primarily to large buyers. However, when input markets, or complementary markets like insurance and credit, function poorly, complex vertical contracts govern prices that reflect more than standard oligopsony markdowns. I quantify how two features of such settings shape prices. First, contracts create surplus by mitigating frictions–specifying stable quantities to reduce profit variability when insurance markets function poorly–so low prices may reflect the buyer’s share of gains. Second, buyers reduce dependence on frictional markets by partially sourcing in-house, potentially enabling surplus capture through threats to replace external suppliers with in-house production. Using novel data on a major Indian garment manufacturer’s universe of fabric purchases from ~500 suppliers, I estimate a structural bargaining model to decompose how prices reflect these two features. Surplus creation from insurance-like contract terms explains low prices, with the buyer receiving ~60% of gains, rather than capture from replacement threats; difference-in-differences estimates yield consistent findings. Counterfactuals illustrate that greater buyer competition has limited effects on prices paid to small risk-averse suppliers, but profit insurance substantially increases prices.