Trade Adjustment Costs in Developing Countries: - World Bank ...

Barriers to Exit from Subsistence Agriculture 95,(6)for demand, and(7)where τ is the common component of transaction costs (that is, expected transactioncosts are identical across farmers). Estimating (5) to (7) on a cross-sectionof 324 maize-producing farmers in Kenya, Renkow et al. (date) obtain a surprisinglylow 15 per cent for the AVE of fixed transaction costs.Vakis et al. (2003) take a different route and propose an interesting approachwhere transaction costs are retrieved from the farmers’ choice of where to sell.They use a 2001 cross-section survey of small Peruvian farmers, in which 1,096potato transactions are observed individually on five markets. The problem is toestimate simultaneously a price equation (the price effectively received by afarmer on transaction i in market k), a transaction-costs equation (also on transactioni in market k) and a market-choice equation. The price equation iswhere P ij includes determinants of the price received on transaction i in marketk: the price level on market j, the volume sold (which must of course be instrumented),and a vector of farm characteristics. The transaction-cost equation iswhere T ij includes determinants of transaction costs on market j, including distanceetc., and the market-choice equation is(8)(9)where profit is given byand(10)(11)(12)In (12), z fik is a proxy for the fixed costs of transaction i on market k, for whichVakis et al.(date) use the percentage of a village’s farmers stating that they knowprices in market k. The first argument in (12) is the source of problems, becauseprices p ik and transaction costs t ik can be estimated only for transactions thattake place; not for off-equilibrium transactions. The solution is, once more, aHeckman-type two-step approach that goes roughly like this.