The Effects of Fair Trade When Productivity Differences Matter

This paper uses a heterogeneous firms model to scrutinize the alleged aim of Fair Trade to help the most disadvantaged producers in developing countries. Incorporating important aspects of Fair Trade in a two-good heterogeneous firm model we show that the more productive firms will join Fair Trade arrangements. Presuming that the least advantaged producers are those with lowest productivity, it thus appears that Fair Trade cannot live up to its expectations.