To build his case, Ameet Morjaria, an assistant professor of managerial economics and decision sciences at the Kellogg School, turned to the rose trade in Kenya – a thriving industry that he says has “managed to set up a supply line to the developed world. And they’ve achieved this in a relatively short period.”

Just how healthy is the rose industry in Kenya? Today, an estimated 500,000 Kenyans on over 100 flower farms depend on the trade for their livelihood. The nation’s flower exports have grown from about 11,000 tons in 1988 to more than 136,000 tons in 2014, making Kenya the third-largest exporter of cut flowers in the world. Many of these flowers head to the European Union, where they account for about a third of all flower sales.

The rose trade’s rapid growth has been driven by Kenya’s sunny climate, low labor costs, and strong air-transportation links to Europe. And this has all been done in the absence of formal contracts. Since flowers are highly fragile and perishable, contracts would be unenforceable, with buyers and sellers making claims that no court could verify.

Instead, buyers and sellers rely on longstanding relationships. Morjaria and his coauthor, Rocco Macchiavello of Warwick University, examined these relationships, finding that despite their informal nature, some look much like successful long-term relationships in any commercial domain, with sellers willing to forgo even substantial short-term profit in order to maintain them.

In a contract-free industry, relationships offer stability and predictability for both sides of the transaction. Sellers are able to plan their production schedule in advance, while buyers have a reliable supply at a known price.

However, buyers and sellers have another option: the flower auctions in the Netherlands. Here sellers are not obligated to deliver particular quantities of flowers, and buyers can purchase only the volume they need. Generally, the Dutch auctions act as proving ground for fledging rose producers or as a safety valve when a seller’s established customers cannot absorb its entire supply. In addition, the auctions provide a reference price that helps buyers and sellers ground their relationship in a common understanding of the prevailing market conditions.

Morjaria and Macchiavello wanted to investigate just how committed rose growers were to their relationships with their regular buyers. In the years preceding Kenya’s 2007 presidential election, the researchers observed the value of these relationships to be sizeable, with sellers often giving up short-term gains of up to 30% in order to keep their commitments. But what happened when extenuating circumstances made commitments especially difficult - and expensive - to honour?

Source: Kellogg School of Management via HortiBiz