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 The study is based on data Michelson collected from 400 farmers
over eight years, beginning the year Walmart began buying
produce in Nicaragua. The data include when farmers entered a
relationship with Walmart and when they dropped out.
“We find evidence of what’s known in economics as ‘strategic
delay,’ when it looks like people are holding back and waiting
to see how an arrangement works out for their neighbor. If
things look like they’re going well, they join,” Michelson says.
Michelson says the wait-and-see strategy makes a lot of sense
and in economic terms it has some implications.
“There are some costs for a buyer to begin dealing with a new
community. There are search and transportation costs to begin
sourcing in a new location, for example. So if a buyer goes
through all of that and there’s only one farmer to buy from,
that first farmer may have to bear some of those start-up costs
on his own,” Michelson says.
Michelson says Walmart buyers have strict quality parameters for
fruits and vegetables and will only accept the produce that
meets those criteria. But as more and more farmers in an area
join the supply chain, her analysis finds that the rejection
rates for produce go down and the percentage Walmart buys goes
up.
“We have data from year to year of how much Walmart was buying
from each farmer. And we see that as more farmers from a
community joined, Walmart winds up buying more and rejecting
less from each individual farmer. The buyer comes more
frequently and prices get better over time as well.
Consequently, the early adopters benefit as more people join,
but they’ve had to bear the initial cost of testing out the
relationship. To some degree, later adopters free ride on the
information provided by those early adopters.”
Walmart in Nicaragua is expanding rapidly with over 100 stores.
For a country with 6 million people, it has more stores per
person than in the United States. According to Michelson,
getting the right first adopter could matter a lot.
“If you think of it from Walmart’s perspective,
you want to be really smart about who you establish that initial
relationship with,” she says. “When you’re trying to make
initial investments or forays into communities with the hope
that you’ll develop a robust, broader network of suppliers, then
initially selecting the wrong farmer could lead to real
challenges.
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"If that first farmer enters a relationship with
Walmart and has a bad experience, you could have others deciding to
stay out of that relationship because they make broader inferences
about that relationship based on the perceived outcomes of their
neighbor.”
In the United States, when new internet providers come into a
community, some offer an incentive to early adopters – people who
will sign up with a deposit even before it is available to them get
the first year at a lower price per month, or some other incentive
to join.
“If Walmart could establish something similar in Nicaragua, there
could be an initial cadre of farmers to learn from,” Michelson says.
“One policy implication is that you could provide early adopters
with some assistance or incentive because their initial willingness
to enter into a relationship with a buyer provides a lot of good
opportunities to lots of other people. By subsidizing that initial
attempt, farmers could try it out without bearing a lot of private
costs. Then, if they try and leave, it might not have significant
economic consequences for them.”
The study, “Influence of neighbor experience and exit on small
farmer market participation,” is published in American Journal of
Agricultural Economics. The paper is authored by Hope Michelson.
Funding for the work was provided in part by the US Agency for
International Development (USAID) Agreement No. EDH-A-00-06-0003-00
awarded to the Assets and Market Access Collaborative Research
Support Program (AMA CRSP).
Hope Michelson is an assistant professor in the Department of
Agricultural and Consumer Economics in the College of Agricultural,
Consumer and Environmental Sciences at the University of Illinois
and a member of the Division of Nutritional Sciences.
[Debra Levey Larson
University of Illinois
College of Agricultural, Consumer and Environmental Sciences]
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