Research
Working Papers
Value Creation and Value Capture in Indian Garment Sector Bargaining
Low prices paid by large exporters to suppliers in low- and middle-income countries raise concerns that gains from exporting are unequally distributed. I study how input prices reflect two distinct forms of buyer power arising from buyers’ responses to frictional input and supporting markets. Buyer power over surplus creation reflects buyers retaining part of the surplus created when vertical contracts mitigate frictions, such as by providing quantity assurance or trade credit when external insurance or credit markets function poorly. Buyer power from surplus capture reflects buyers reducing prices through replacement threats enabled by partial vertical integration, shifting rents without increasing agreement surplus. Distinguishing between these forms matters because they imply different efficiency, distributional, and policy conclusions. I build and estimate a structural bargaining model using proprietary data on the universe of fabric purchases by a large Indian garment manufacturer. Buyer power over surplus creation, not surplus capture, explains observed discounts; the buyer retains ~60% of created surplus.