Can contracts substitute hierarchy? Evidence from high-quality coffee supply in Brazil

Abstract

Purpose A trend toward higher quality has demanded more strategic investments in the transaction of coffee supply in Brazil. Instead of internalizing this transaction, one firm, illycaffè, has challenged the vertical integration assumption by adopting contracts to coordinate its supply. Aiming to investigate whether this firm is losing economic efficiency in terms of coordination, or whether it is being efficient due to a proper definition and allocation of property and decision rights, the purpose of this paper is to analyze the transaction attributes of illycaffè’s suppliers according to the vertical integration dilemma. Design/methodology/approach The research design is based on a survey of 105 coffee growers analyzed through probit regression. Using a transaction costs approach, the study empirically tests whether well-designed contracts can act as a hierarchy by following the efficient alignment hypothesis. Findings The results emphasize asset specificity, uncertainty and incentives as determinants for being an illycaffè supplier. In other words, these findings demonstrate that a well-designed contract can substitute a hierarchy based on transaction costs economics. It contributes by illustrating other coordination alternatives overlapping vertical integration, even in environments of high uncertainty and asset specificity, which encourages other private strategies based on allocation of property and decision rights of hybrid arrangements. Originality/value The study adopts a unique survey about transaction costs in the transactions of high-quality coffee supply in Brazil. The main contribution is to shed light on the cases where, how and why contracts can substitute the need for in-house production, and to guide private and public strategies using this background.

When Unfair Trade Is Also at Home: The Economic Sustainability of Coffee Farms

“…Ethiopia is the country in which producers obtained the lowest value (53%) in the period analyzed. In Brazil, coffee production involves complex governance mechanisms to coordinate the whole chain towards both domestic and international markets [21,40]. Although present in remote locations, the supply chain involves a supportive activity from private agents who collectively handle issues that government fails to address [30,41].…”

Coffee farmers' incentives to comply with sustainability standards

“…Both formal contract and technical assistance are supported by transaction cost economics theory (Williamson, 1985), because the producer has a guarantee that the investment made will not be lost. The coffee certification adoption requires more investments from producers that increase the specificity of assets in the transaction (Oliveira, et al, 2019). The higher the asset specificity, the higher the control on the transaction and also the tendency for adopting well-designed contracts for guaranteeing the investments.…”

Atributos de Qualidade e Complexidade de Mensuração nas Transações: um estudo em exportadora de cafés especiais (Quality Attributes and Complexity of Measurement in Transactions: a study in an exporter of special coffee)

“…Isso faz com que o processo de compra e venda dos cafés especiais seja complexo. Embora a informação sobre os atributos que compõem o café seja condição para a realização das transações e reconhecimento do valor do produto, essas informações são desconhecidas em primeira instância, podendo gerar problemas de assimetria de informação, conforme previsto por Oliveira et al (2019). Assim, analisar quais os principais atributos que compõem o café e como são mensurados, contribuem para a cadeia.…”

“…Sem a existência e disseminação de informações sobre um produto, a composição do bem e seu real valor tornam-se obscuros, fazendo com que as transações ocorram com base em "caixas pretas". Os problemas de assimetria de informação surgem a partir das divergências na detenção da informação sobre o que é transacionado, podendo estar em detenção de diferentes agentes na cadeia (CLAY et al, 2018;OLIVEIRA et al, 2019;GUIMARÃES et al, 2020).…”