Formal Institutions and Social Capital in Value Chains:: The Case of the Ethiopian Commodity Exchange

Abstract

We explore whether the creation of the Ethiopian Commodity Exchange (ECX) and its formal monitoring and enforcement institutions has affected social capital and trust in the Ethiopian segment of the sesame value chain. Consistent with a simple theoretical marketing model, our panel data suggest this is indeed the case. Trade in sesame is increasingly governed by formal rather than informal institutions, and in response traders have broadened their trading network, rely more frequently on traders with whom they do not have social relations, and have reduced the provision of credit that cements personalized relationships. They also have lower levels of trust in the intentions and capabilities of their trading partners, and attach less weight to trust.