Identifier

1113

Document Type

Discussion Paper

Date of Paper

Spring 4-24-2025

Abstract

This paper examines creation and distribution of surplus from global value chains (GVCs) in low- and middle-income country (LMIC) domestic supply chains. While GVC participation can enhance growth and productivity, low prices paid to small input suppliers raise concerns that gains from GVC participation accrue to the large exporters (the buyers). Supply-chain transactions often occur in bargained agreements with non-price terms that increase small supplier surplus, such as quantity stability and other insurance-like terms. Therefore, low input prices reflect both buyers’ share of surplus generated by non-price terms and buyer capture. I enrich a Nash bargaining model to study how both i) value creation through insurance-like agreement terms that mitigate spot market frictions and ii) value capture from buyers threatening to replace external suppliers with in-house production affect prices paid to small, risk-averse suppliers. Using novel transaction data from an Indian garment manufacturer and its nearly 500 fabric suppliers, I estimate a structural model to decompose dis-counts into value creation and capture. Results illustrate that discounts reflect value creation rather than buyer capture; difference-in-differences estimates yield consistent findings. Counterfactual analyses highlight that increasing buyer competition has limited effects on prices paid to small risk-averse suppliers, whereas introducing profit insurance substantially increases prices they receive.

Acknowledgements

I am extremely grateful to Lauren Falcao Bergquist, Zach Brown, Ying Fan, and Dean Yang for their guidance and support. I also thank Achyuta Adhvaryu, Francesco Amodio, Jie Bai, Hoyt Bleakley, Binta Zahra Diop, Mayara Felix, Bob Gibbons, Max Huppertz, Chuqing Jin, Amit Khandelwal, Asim Ijaz Khwaja, Francine Lafontaine, David A. Miller, Charlie Murry, Ameet Morjaria, Emir Murathanoglu, Thi Mai Anh Nguyen, Anant Nyshadham, Michael Raith, and Yulu Tang for their excellent feedback and comments, as well as seminar participants at CSAE 2024, EEA 2024, MWIEDC 2024, NEUDC 2024, OECD, PacDev 2025, Paris School of Economics, SIOE 2024, University of Michigan, University of Rochester (Simon Business School), University of Southern California, Wayne State University, and Yale University. I appreciate the team at Shahi Exports and Good Business Lab for teaching me about fabric procurement and providing the data. All errors are my own.

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