Relational Contracts and Product Quality: The Effect of Bargaining Power on Efficiency and Distribution
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This paper studies how changes in bargaining power alter the surplus distribution and
sustainability of incomplete agricultural contracts. When an enforceable payment exists, selfenforcement
is always sustainable, the highest quality is traded, and any surplus distribution is
possible. However, there is a limit to how much bargaining power can be exercised when contracts
are fully incomplete, as a seller cannot extract too much of the surplus without breaking down
the trading relationship. The results provide insight into the limits of policies that attempt to
redistribute bargaining power in markets having informal institutions or in which parties rely on
implicit contracts.