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While transacting parties may find ways to avoid adverse effects of weak contracting institutions, radical reform reorganising the system of exchange can be very costly. We illustrate this by studying the economic consequences of the dislocation of the Polish dairy supply chain during transition. Examining a natural experiment between two different modes of governance (bureaucratic and market-based), we provide evidence that the disorganisation of vertical linkages between upstream and downstream producers negatively affected output. Our most conservative estimates suggests that the dislocation to inter-firm relationships accounted for approximately 20% of the fall in milk output observed in the early-transition phase.


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