Quality and Inclusion of Producers in Value Chains: A Theoretical Note

This paper develops a formal theory of the endogenous process of the introduction of high quality production in developing countries. Initial differences in income and capital and transaction costs are shown to affect the emergence of and the size of the high quality economy. Initial differences in the production structure and the nature of transaction costsas well as the possibility of contracting between producers and processorsare shown to determine which producers are included in the high quality economy, and which not.