Of markets and middlemen
Using survey data on traders and brokers in the Ethiopian foodgrain market, this paper reveals that the brokerage institution is critical to market performance in that it enables traders to circumvent the commitment problem of long-distance trade with unknown partners. In the absence of grain standardization, public information, and legal contract enforcement, brokers act as inspectors and guarantors of each transaction. The paper analyzes the sources of commitment failure, the role and functions of brokers and the extent of brokerage use by brokers, and argues that agency relations are not based on ethnicity, depend on effective reputation rather than trust, and are structured in an incentive-compatible manner.
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- Geertz, Clifford, 1978. "The Bazaar Economy: Information and Search in Peasant Marketing," American Economic Review, American Economic Association, vol. 68(2), pages 28-32, May.
- Paul R. Milgrom & Douglass C. North & Barry R. Weingast, 1990. "The Role Of Institutions In The Revival Of Trade: The Law Merchant, Private Judges, And The Champagne Fairs," Economics and Politics, Wiley Blackwell, vol. 2(1), pages 1-23, 03.
- Heytens, Paul J., 1986. "Testing Market Integration," Food Research Institute Studies, Stanford University, Food Research Institute, issue 01.
- Kranton, Rachel E, 1996. "Reciprocal Exchange: A Self-Sustaining System," American Economic Review, American Economic Association, vol. 86(4), pages 830-51, September.
- Harold Demsetz, 1968. "The Cost of Transacting," The Quarterly Journal of Economics, Oxford University Press, vol. 82(1), pages 33-53.
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