The effects of Fair Trade when productivity differences matter

This paper uses a heterogeneous …rms model to scrutinize Fair Trade’s aim to help the most disadvantaged producers in developing countries. Incorporating important aspects of Fair Trade in a two-good heterogeneous …rm model we show that only the most productive …rms will join Fair Trade arrangements. Higher required production standards and entry costs make Fair Trade not viable for low-productivity …rms, despite its advantage of o¤ering direct and secure distribution channels to international consumer markets. To overcome this selection e¤ect, Fair Trade organizations may want to reconsider their selection criteria, focussing on a …rm’s productivity rather than its capacity to adhere to Fair Trade standards.