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Increasing Returns and Market Efficiency in Agricultural Trade

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  • Marcel Fafchamps
  • Eleni Gabre-Madhin

Abstract

Using detailed trader surveys in Benin, Madagascar, and Malawi, this paper investigates the presence of increasing returns in agricultural trade. After analyzing margins, costs, and value added, we find little evidence of returns to scale. Motorized transport is found more cost effective for large loads on longer distances. But transporters pool quantities from multiple traders. Margin rates show little relationship with transaction size. Personal travel costs are a source of increasing returns, but the effect is small. Consequently, total marketing costs are nearly proportional to transaction size. Working and network capital are key determinants of value added. Constant returns to scale in all aaccumulable factors – working capital, labour, and network capital – cannot be rejected. This implies that policies to restrict entry into agricultural trade are neither necessary nor useful. Governments should focus instead on technological and institutional innovations to upgrade agricultural markets.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2002-18.

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Date of creation: 01 Apr 2002
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Handle: RePEc:oxf:wpaper:wps/2002-18

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  10. Fafchamps, Marcel & Gabre-Madhin, Eleni, 2001. "Agricultural markets in Benin and Malawi : the operation and performance of traders," Policy Research Working Paper Series 2734, The World Bank.
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  18. Gabre-Madhin, Eleni Z., 2001. "The role of intermediaries in enhancing market efficiency in the Ethiopian grain market," Agricultural Economics, Blackwell, vol. 25(2-3), pages 311-320, September.
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  22. Badiane, Ousmane & Shively, Gerald E., 1998. "Spatial integration, transport costs, and the response of local prices to policy changes in Ghana," Journal of Development Economics, Elsevier, vol. 56(2), pages 411-431, August.
  23. Marcel Fafchamps & Bart Minten, 1999. "Relationships and traders in Madagascar," Journal of Development Studies, Taylor & Francis Journals, vol. 35(6), pages 1-35.
  24. 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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