Restricting Trade and Reducing Variety: Evidence from Ethiopia

The study of consumption in poor households usually focuses on the costs of the consumption basket rather than its composition. In contrast, we investigate the variety in consumption using data from rural Ethiopia. We examine the loss in variety in remote locations, relying on a purpose-designed longitudinal survey over two years, where villages differ only in distance to the market and are homogenous otherwise. In addition, we exploit a change in policy which resulted in a crackdown on informal or unlicensed traders in the second year but which affected only the more remote set of villages and resulted in a fall in availability in these villages. We examine the welfare impact of the crackdown on traders by calculating the compensating and equivalent variation and find a fall in welfare between 11% and 13% of incomes for households affected by the crackdown, mostly driven by the resultant fall in varieties available. The welfare costs of remoteness are driven by not just the fall in consumption but also the fall in variety in consumption.