Ethnicity and Markets: Supplier Manufacturing in African Manufacturing

Marcel Fafchamps

Working Papers from Stanford University, Department of Economics

Abstract: First draft: April 1996 This draft: October 1996

This paper investigates the rationale for statistical discrimination and networks effects in the allocation of supplier credit. It examines the role they may play in favoring market participation and, hence, in the emergence and persistence of ethnically homogeneous business groups. We show that members of a successful business community may rationally choose not to grant trade credit to members of other communities if the latter are, on average, less experienced or if they are not part of their reputation network. Using case study data on trade credit among manufacturing firms in Kenya and Zimbabwe, we uncover evidence that blacks are disadvantaged in the attribution of supplier credit. Statistical discrimination and network effects seem to both play a role in explaining ethnic bias.

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