This paper studies strategic default on forward sale contracts in the international coffee market. To test for strategic default, we construct contract-specific measures of unanticipated changes in market conditions by comparing spot prices at maturity with the relevant futures prices at the contracting date. Unanticipated rises in market prices increase defaults on fixed price contracts but not on priceindexed ones. We isolate strategic default by focusing on unanticipated rises at the time of delivery after production decisions are sunk and suppliers have been paid. Estimates suggest that roughly half of the observed defaults are strategic. We model how strategic default introduces a trade-off between insurance and counterparty risk: relative to indexed contracts, fixed-price contracts insure against price swings but create incentives to default when market conditions change. A model calibration suggests that the possibility of strategic default causes 15.8% average losses in output, significant dispersion in the marginal product of capital and sizeable negative externalities on supplying farmers.
Can divide-and-rule colonial policy be responsible for contemporary ethnic tension? This paper empirically investigates the role of a divisive and extractive colonial policy on Hutu-Tutsi discord in Rwanda and Burundi. It shows that Hutu with a family history of subjugation to forced labour by Tutsi chiefs are less trusting of Tutsi today and less willing to partner with Tutsi for a cooperative task. This may have implications for agriculture insurance agreements since Hutu are more agrarian and Tutsi are more pastoral. Indeed, Hutu with a forced labour family history make fewer inter-household insurance agreements and are more likely to experience default.
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