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Measuring Transactions Costs from Observed Behavior: Market Choices in Peru

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  • Vakis, Renos
  • Sadoulet, Elisabeth
  • de Janvry, Alain

Abstract

Farmers incur proportional and fixed transactions costs in selling their crops on markets. Using data for Peruvian potato farmers, we propose a method to measure these transactions costs. When opportunities exist to sell a crop on alternative markets, the observed choice of market can be used to infer a monetary measure of transactions costs in market participation. The market choice model is first estimated at the reduced form level with a conditional logit, as a function of variables that explain transactions costs. We then use these market choice equations to control for selection in predicting the idiosyncratic prices that would be received on all markets and the idiosyncratic proportional transactions costs that would be incurred to reach all markets. The net between the two gives us a measure of effective farm-level prices. This allows us to estimate a semi-structural conditional logit of the market choice model. In this model, the choice of market is a function of predicted effective farm-level prices, and of market information that accounts for fixed transactions costs. We can use the estimated coefficients to derive the price equivalence of the fixed cost due to information. We find that the information on market price that farmers receive from their neighbors reduces fixed transactions costs by the equivalent of doubling the price received, and is equal to four times the average transportation cost.

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Bibliographic Info

Paper provided by Department of Agricultural & Resource Economics, UC Berkeley in its series Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series with number qt7p81h66q.

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Date of creation: 01 Oct 2003
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Handle: RePEc:cdl:agrebk:qt7p81h66q

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Keywords: transactions costs; market choice; information;

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References

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  1. Albert Park & Hehui Jin & Scott Rozelle & Jikun Huang, 2002. "Market Emergence and Transition: Arbitrage, Transaction Costs, and Autarky in China's Grain Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(1), pages 67-82.
  2. Steven Were Omamo, 1998. "Transport Costs and Smallholder Cropping Choices: An Application to Siaya District, Kenya," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 116-123.
  3. Cogan, John F, 1981. "Fixed Costs and Labor Supply," Econometrica, Econometric Society, vol. 49(4), pages 945-63, June.
  4. Minten, Bart & Kyle, Steven, 1999. "The effect of distance and road quality on food collection, marketing margins, and traders' wages: evidence from the former Zaire," Journal of Development Economics, Elsevier, vol. 60(2), pages 467-495, December.
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Cited by:
  1. Henning, Christian H.C.A. & Henningsen, Arne, 2005. "Modeling Price Response of Farm Households Under Imperfect Labor Markets: A Farm Household Approach to Family Farms in Poland," 94th Seminar, April 9-10, 2005, Ashford, UK 24431, European Association of Agricultural Economists.
  2. Takeshima, Hiroyuki, 2008. "Behavior of subsistence producers in response to technological change- The elasticity of cassava production and home consumption in Benin," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6108, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  3. Rios, Ana R. & Shively, Gerald E. & Masters, William A., 2009. "Farm Productivity and Household Market Participation: Evidence from LSMS Data," 2009 Conference, August 16-22, 2009, Beijing, China 51031, International Association of Agricultural Economists.
  4. Mahdi, Shireen, 2012. "Distance to market and search costs in an African maize market," Policy Research Working Paper Series 6172, The World Bank.
  5. Marenya, Paswel Phiri & Barrett, Christopher B., 2009. "The effect of soil quality on fertilizer use rates among smallholder farmers in western Kenya," 2009 Conference, August 16-22, 2009, Beijing, China 51671, International Association of Agricultural Economists.
  6. Okoye, B.C & Onyenweaku, C.E & Ukoha, O.O, 2010. "An Ordered Probit Model Analysis of Transaction Costs and Market Participation by Small-Holder Cassava Farmers in South-Eastern Nigeria," MPRA Paper 26114, University Library of Munich, Germany.
  7. Cadot, Olivier & Dutoit, Laure & Olarreaga, Marcelo, 2010. "Barriers to Exit from Subsistence Agriculture," CEPREMAP Working Papers (Docweb) 1014, CEPREMAP.
  8. Rios, Ana R. & Masters, William A. & Shively, Gerald E., 2008. "Linkages between Market Participation and Productivity: Results from a Multi-Country Farm Household Sample," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6145, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  9. Cadot, Olivier & Dutoit, Laure & Olarreaga, Marcelo, 2006. "How costly is it for poor farmers to lift themselves out of poverty?," Policy Research Working Paper Series 3881, The World Bank.
  10. Zanello, Giacomo & Shankar, Bhavani & Srinivasan, Chittur S., 2012. "Transaction costs, information technologies, and the choice of marketplace amongst farmers in northern Ghana," 86th Annual Conference, April 16-18, 2012, Warwick University, Coventry, UK 134740, Agricultural Economics Society.
  11. Cadot, Olivier & Dutoit, Laure & Olarreaga, Marcelo, 2005. "How Costly is it for Poor Farmers to Lift Themselves out of Subsistence?," CEPR Discussion Papers 5392, C.E.P.R. Discussion Papers.
  12. Takeshima, Hiroyuki & Winter-Nelson, Alex, 2010. "Sales location and supply response among semisubsistence farmers in Benin," IFPRI discussion papers 999, International Food Policy Research Institute (IFPRI).

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