We thank Christian Ghiglino, Abhinay Muthoo, Joe Ostroy, Motty Perry, Pierre Regibeau, Emmanuel Saez, and seminar participants at University of Essex, MILLS Seminar in Milan (IGIER), EARIE 2008 in Toulouse, UC Berkeley, the University of San Francisco, and the University of Carlos III in Madrid. We also thank two anonymous referees and an associate editor for invaluable comments and suggestions.
Efficient Consumer Altruism and Fair Trade Products
Article first published online: 18 JAN 2012
© 2012 Wiley Periodicals, Inc.
Journal of Economics & Management Strategy
Volume 21, Issue 1, pages 213–241, Spring 2012
How to Cite
Reinstein, D. and Song, J. (2012), Efficient Consumer Altruism and Fair Trade Products. Journal of Economics & Management Strategy, 21: 213–241. doi: 10.1111/j.1530-9134.2011.00323.x
- Issue published online: 18 JAN 2012
- Article first published online: 18 JAN 2012
Consumers have shown a willingness to pay a premium for products labeled as “FT” and a preference for retailers that are seen to be more generous to their suppliers/employees. A FT product is essentially a bundle of a base product and a donation to the supplier (e.g., a coffee farmer). An altruistic rational consumer will only choose this bundle if doing so is less expensive than buying the base product and making a direct donation. For FT to be sustainable either in a competitive equilibrium or in a monopolistic environment this bundling must yield an efficiency. This efficiency is generated in the following context. A supplier’s investment reduces the retailer’s cost or boosts the final product’s quality, but this investment is not immediately observable and cannot be enforced, hence there exists a moral hazard problem. In this environment, the altruism of the consumer can facilitate a more efficient contract: by paying the supplier more the retailer can both extract more consumer surplus and increase the level of contracted investment, while preserving the supplier’s incentive compatibility constraint. We assess our model in the context of the coffee industry.