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Estimating shadow prices in economies with multiple market failures

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  • Alan Hernández-Solano
  • Véronique Sophie Avila-Foucat
  • George A Dyer

Abstract

Approaches to the estimation of shadow prices generally assume that all but one market function correctly. However, multiple market failures are common in developing countries. We present a theoretical model and an empirical strategy to estimate the shadow price of a subsistence good in an economy where labor markets fail. Our results show that: 1) among subsistence producers, the shadow price of this good must be greater than or equal to the market price, and equal to it for surplus growers; and 2) current methods create biases when the otherwise-perfect-markets assumption is violated. The propositions are tested using a representative survey for rural Mexico. We find that the shadow wage is below that of the market (MXN $93.2/day vs. MXN $132.3/day), and that the shadow price for subsistence corn is over ten times greater than its market price (MXN $32.37/kg vs. MXN $3.19/kg). Unbiased shadow price estimates for subsistence goods help to overcome the limitations of current income poverty measures: their overestimation of the purchasing power of subsistence households and their underestimation of the value of subsistence goods. In rural Mexico, current practice underestimates the population in food poverty by 2%; an additional 9% has income above the poverty line yet fail to meet the utilization dimension of food security.

Suggested Citation

  • Alan Hernández-Solano & Véronique Sophie Avila-Foucat & George A Dyer, 2023. "Estimating shadow prices in economies with multiple market failures," PLOS ONE, Public Library of Science, vol. 18(11), pages 1-17, November.
  • Handle: RePEc:plo:pone00:0293931
    DOI: 10.1371/journal.pone.0293931
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    References listed on IDEAS

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    1. Emmanuel Skoufias, 1994. "Using Shadow Wages to Estimate Labor Supply of Agricultural Households," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 215-227.
    2. Arslan, Aslihan & Taylor, J.Edward, 2009. "Farmers' Subjective Valuation of Subsistence Crops: The Case of Traditional Maize in Mexico," American Journal of Agricultural Economics APPENDICES, Agricultural and Applied Economics Association, vol. 91(4), pages 1-4, April.
    3. de Janvry, Alain & Fafchamps, Marcel & Sadoulet, Elisabeth, 1991. "Peasant Household Behaviour with Missing Markets: Some Paradoxes Explained," Economic Journal, Royal Economic Society, vol. 101(409), pages 1400-1417, November.
    4. Hanan G. Jacoby, 1993. "Shadow Wages and Peasant Family Labour Supply: An Econometric Application to the Peruvian Sierra," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(4), pages 903-921.
    5. de Janvry, Alain & Fafchamps, M. & Sadoulet, Elisabeth, 1991. "Peasant Household Behavior with Missing Markets: Some Paradoxes Explain," CUDARE Working Papers 198579, University of California, Berkeley, Department of Agricultural and Resource Economics.
    6. Davis, Benjamin & Winters, Paul & Carletto, Gero & Covarrubias, Katia & Quiñones, Esteban J. & Zezza, Alberto & Stamoulis, Kostas & Azzarri, Carlo & DiGiuseppe, Stefania, 2010. "A Cross-Country Comparison of Rural Income Generating Activities," World Development, Elsevier, vol. 38(1), pages 48-63, January.
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