STRUCTURAL MODEL OF AGRICULTURAL MARKETS IN DEVELOPING COUNTRIES

Abstract

Switching regimemodels, including the Parity BoundsModel, are commonly used for assessing market integration, although they are not well suited to multiple market contexts. We develop an alternative structural model of markets that incorporates explanatory variables and generates the probability that a single market is integrated, therefore making it possible to identify specific factors or regions of a country associated with low integration. Our application to intraprovincial rice markets inMadagascar predicts that 56 % of markets are integrated. High crime areas are less likely to be integrated,while the center of the country has a higher level of integration. Key words: generalized method of moments, Madagascar, market integration, parity bounds model. JEL codes: Q11, Q13, C51. Integrated markets are crucial for rural devel-opment because they provide outlets for surplus agricultural production, allow for increased competition, reduce price variability caused by local shocks, and facilitate the trans-mission of macroeconomic policy signals. Yet the analytical tools for assessing market inte-grationarequite limited (Fackler andGoodwin 2001). Switching regime models, such as the Parity Bounds Model, are among the most commonlyusedmethods.However,thesemod-els rely on strong distributional assumptions using maximum likelihood estimation (MLE), are not well identified, and have a limited capacity for identifying the factors contributing to market integration or to high transfer costs. These models are most appropriate when only time-series price data are available for a sin-gle market pair, and are less useful when data sets include prices for multiple market pairs and when additional data on market charac-teristics are available. This article develops a structural model of markets with this type of multiple-market context in mind

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oai:CiteSeerX.psu:10.1.1.995.3332Last time updated on 11/2/2017

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