Research
Working Papers
Value Creation and Value Capture in Indian Garment Sector Bargaining
Low prices paid by large exporters to small suppliers in low- and middle-income countries raise concerns that gains from exporting are unequally distributed. I study how buyers’ contractual and organizational responses to frictional markets generate two distinct forms of buyer power. First, when insurance or credit markets are missing or frictional, vertical contracts can create surplus beyond the input transfer by providing these services inside the buyer-supplier agreement; discounts then reflect buyer power over surplus creation. Second, partial vertical integration may enable threats to replace external suppliers with in-house production, shifting rents to the buyer; discounts then reflect buyer power from surplus capture. Distinguishing between these two forms of buyer power matters because only buyer power over surplus creation gives buyers incentives to mitigate frictions through contract terms. 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, while integration does not lower agreement prices.