DP8615 Intermediaries, transport costs and interlinked transactions

Author(s): Mélanie Lefèvre, Joe Tharakan
Publication Date: October 2011
Keyword(s): Rural development, spatial pricing, transportation
JEL(s): O18, R32
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8615

Transport costs play a key role in agricultural markets in developing countries and are one of the causes of poverty amongst farmers that are geographically isolated. Another characteristic of agricultural markets is that they often involve interlinked transactions. However, the existing theoretical literature on interlinked transactions does not take into account the existence of transport costs. This paper develops a model of input-output interlinked contracts between geographically dispersed farmers and a trader, whether this trader is for-profit or non-profit. We derive implications of imposing either uniform or mill pricing policies, as opposed to spatial price discrimination. Impact on profit, farmers' income, level of production, social welfare and regional disparities are investigated.