Quality Observability and the Structure of Agricultural Supply Chains

This paper presents a model of a supply chain for a good involving two stages of production. Effort must be exerted at both stages if a high-quality good is to be produced. Effort is not observable and the quality of the good is not perfectly observable. The model predicts that there will be a range of values of the price difference between high-quality and low-quality goods for which production of high-quality goods will occur with vertical integration but will not occur if the tasks are carried out by separate agents. The range of price values for which this occurs will be decreasing as the level of observability of quality increases and will disappear as quality becomes perfectly observable. The paper also presents some case studies of supply chains for various products in a number of developing countries that have characteristics which are consistent with the predictions of the model.