Economies of Density and Congestion in Equipment Rental Markets

Julieta Caunedo, Namrata Kala and Zhang, Haimeng (Hester)

No 17771, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Rental markets are expanding access to mechanization for small-holder farmers in developing countries. However, gains from adoption depend on market structure and the spatial concentration of demand, which implies that understanding how mechanization is allocated during peak demand is key to understanding the returns to policies expanding access. We develop a model of equipment rental markets where demand varies by farm size and location, and supply varies by dispatch rule (first-come-first-served vs. profit-maximizing). An efficient allocation prioritizes large-scale demand, because the cost of moving equipment in space dilutes with scale; as well as small-scale demand in dense locations, because it maximizes machine-capacity utilization. Using novel transaction-level data and a new census of farmers from Karnataka, India, we calibrate the model and evaluate policy-relevant counterfactuals to expand access. Deregulating first-come-first-served rules to allow profit maximization raises aggregate surplus by 10% and reduces output costs from delays by 31% (about 2.8 p.p. in units of average productivity). All farmers experience gains, with large-holders benefiting relatively more. These effects are comparable in magnitude to a 20% increase in equipment supply, but save the cost of that increased capacity.are also valuable because they maximize machine-capacity utilization by increasing demand density. Through counterfactuals, we show that even when providers prioritize large-scale farmers, service finding rates for small-scale producers may exceed those of large-scale producers. The ability of additional supply to reach small-scale producers depends on the joint spatial and size distribution of demand, a novel rationale for the heterogeneous impact of subsidies to capital documented in the literature.

Keywords: agriculture; Economic geography; Mechanization; Rental markets; Search (search for similar items in EconPapers)
JEL-codes: O13 O18 O47 R41 (search for similar items in EconPapers)
Date: 2022-12
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