Decision Making in the Presence of Transaction Costs –evidence from Smallholder Banana Farmers in Murang’a County, Kenya

Agricultural marketing in Kenya, just like other developing countries, is characterised by long transaction chains, poor access to appropriate and timely information, high transport and transaction costs. In Murang’a County the banana is an important horticultural crop in terms of its present and potential contribution to income enhancement of smallholder farmers. Farmers can opt to sell their bananas through various marketing outlets. The main outlets include sales to local traders and brokers at the farm gate, direct marketing to consumers and to a lesser degree, through producer marketing groups. Among the factors influencing choice of marketing outlet used to sell bananas by a farmer, are the transaction costs embedded in each outlet. However, the effect of transaction costs on choice of marketing outlet for bananas has not been extensively explored in Kenya, thus the purpose of this study. Primary data was obtained from a survey of 120 smallholder farmers in Murang’a County. A multinomial logit analysis was used to analyse the factors influencing choice of marketing outlet. The study draws imperative findings that could guide policy towards reducing transaction costs in banana marketing. Particularly, results indicate that farmers make a decision on choice of outlet based on the market information cost, hours of information search, road condition, trust in buyer, negotiation time, distance to the market and transport costs associated with that outlet. Encouraging group marketing and provision of timely and reliable market information are some of the key recommendations from this study which could help to improve banana marketing, so that smallholder farmers can benefit from high value markets.