Estimating shadow prices in economies with multiple market failures

Alan Hernández-Solano, Véronique Sophie Avila-Foucat and George A Dyer

PLOS ONE, 2023, vol. 18, issue 11, 1-17

Abstract: Approaches to the estimation of shadow prices generally assume that all but one market function correctly. However, multiple market failures are common in developing countries. We present a theoretical model and an empirical strategy to estimate the shadow price of a subsistence good in an economy where labor markets fail. Our results show that: 1) among subsistence producers, the shadow price of this good must be greater than or equal to the market price, and equal to it for surplus growers; and 2) current methods create biases when the otherwise-perfect-markets assumption is violated. The propositions are tested using a representative survey for rural Mexico. We find that the shadow wage is below that of the market (MXN $93.2/day vs. MXN $132.3/day), and that the shadow price for subsistence corn is over ten times greater than its market price (MXN $32.37/kg vs. MXN $3.19/kg). Unbiased shadow price estimates for subsistence goods help to overcome the limitations of current income poverty measures: their overestimation of the purchasing power of subsistence households and their underestimation of the value of subsistence goods. In rural Mexico, current practice underestimates the population in food poverty by 2%; an additional 9% has income above the poverty line yet fail to meet the utilization dimension of food security.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0293931

DOI: 10.1371/journal.pone.0293931

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