Strategic default in the international coffee market

Arthur Blouin and Rocco Macchiavello

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This article studies strategic default on forward sale contracts in the international coffee market. To test for strategic default, we construct contract-specific measures of unanticipated changes in market conditions by comparing spot prices at maturity with the relevant futures prices at the contracting date. Unanticipated rises in market prices increase defaults on fixed-price contracts but not on price-indexed ones. We isolate strategic default by focusing on unanticipated rises at the time of delivery after production decisions are sunk and suppliers have been paid. Estimates suggest that roughly half of the observed defaults are strategic. We model how strategic default introduces a trade-off between insurance and counterparty risk: relative to indexed contracts, fixed-price contracts insure against price swings but create incentives to default when market conditions change. A model calibration suggests that the possibility of strategic default causes 15.8% average losses in output, significant dispersion in the marginal product of capital, and sizable negative externalities on supplying farmers.

JEL-codes: G32 L14 O16 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2019-05-01
New Economics Papers: this item is included in nep-agr and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Published in Quarterly Journal of Economics, 1, May, 2019, 134(2), pp. 895 - 951. ISSN: 0033-5533

Downloads: (external link)
http://eprints.lse.ac.uk/101080/ Open access version. (application/pdf)

Related works:
Journal Article: Strategic Default in the International Coffee Market (2019)
Working Paper: Strategic Default in the International Coffee Market (2018)
Working Paper: Strategic Default in the International Coffee Market (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:101080

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