Gains from Agricultural Market Reform: Role and Size of Intermediaries

Abstract

How does market structure and the presence of intermediaries impact the cropping pattern and agricultural trade within a country? The difference between farm-gate and consumer prices implies large intra-national trade costs but it is difficult to know the contribution of intermediary margins to these costs. This paper exploits a pro-competitive policy reform from India, that allowed free entry of intermediaries in the agricultural markets, to quantify the size of these margins. I develop a Ricardian style comparative advantage model of intra-national trade in agricultural crops, which embeds intermediaries and is suitable for this study of market structure change. The model gives a structural equation that allows me to estimate the change in intermediary margin due to this reform. I find that post reform the intermediary margin decreased by 16% for Groundnut, one of the major crops in this region. I then connect the model with rich micro datasets on farm productivity and land use to estimate relevant parameters to run counter-factual experiments which reveal that the reform will increase average welfare by 1.3% through changes in cropping pattern.

JEL Classification: F11, O13, Q17, D58