Tests for market failures and overcoming transaction costs barriers to market participation in Afghanistan

Ahmadzai, Hayatullah

Abstract

Similar to other fragile poor countries, the majority of the rural population in Afghanistan depend directly or indirectly on small-scale farming for their livelihoods, and poor infrastructure and other barriers restrict access to markets and services, making improving access to local input markets a significant challenge for policymakers aiming to increase productivity. This paper offers empirical evidence addressing two important issues for smallholder participation in input markets: are rural markets incomplete or failing and how do transaction costs affect participation in factor markets? Pooled cross-sectional data from three waves of nationally representative surveys between 2011 and 2016 with a sample of nearly 21,000 households are used. The analysis first tests and rejects the separability hypothesis that household production and consumption decisions are independent which can be interpreted as evidence of market failures. A control function approach with instrumental variables to address endogeneity is employed to estimate household input market participation decisions. Ownership of or access to information and communication technology and transport equipment are used as proxies for transaction costs. Results confirm that lower transaction costs increase input market participation and expenditure on inputs by farm households. Additionally, households with better access to roads and district or provincial market centres have higher market participation and expenditure on input. Reducing transaction costs plays an important role in input use, potentially increasing productivity and incomes.

Citation

Ahmadzai, H. (2024). Tests for market failures and overcoming transaction costs barriers to market participation in Afghanistan. Journal of Social and Economic Development, https://doi.org/10.1007/s40847-024-00364-2

• Journal Article Type: Article
• Acceptance Date: Jul 5, 2024
• Online Publication Date: Jul 30, 2024
• Publication Date: Jul 30, 2024
• Deposit Date: Aug 2, 2024
• Publicly Available Date: Aug 2, 2024
• Journal: Journal of Social and Economic Development
• Print ISSN: 0972-5792
• Electronic ISSN: 2199-6873
• Publisher: Springer
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1007/s40847-024-00364-2
• Keywords: Transaction costs; Rural markets; Separability; Market participation; Afghanistan
• Public URL: https://nottingham-repository.worktribe.com/output/37929618
• Additional Information: Accepted: 5 July 2024; First Online: 30 July 2024; : The authors have no conflict of interest to declare that are relevant to the content of this article.