A conceptual model of incomplete markets and the consequences for technology adoption policies in Ethiopia

Donald Larson () and Daniel Zerfu Gurara

No 6681, Policy Research Working Paper Series from The World Bank

Abstract: In Africa, farmers have been reluctant to take up new varieties of staple crops developed to boost smallholder yields and rural incomes. Low fertilizer use is often mentioned as a proximate cause, but some believe the problem originates with incomplete input markets. As a remedy, African governments have introduced technology adoption programs with fertilizer subsidies as a core component. Still, the links between market performance and choices about using fertilizer are poorly articulated in empirical studies and policy discussions, making it difficult to judge whether the programs are expected to generate lasting benefits or to simply offset high fertilizer prices. This paper develops a conceptual model to show how choices made by agents supplying input services combine with household livelihood settings to generate heterogeneous decisions about fertilizer use. An applied model is estimated with data from a panel survey in rural Ethiopia. The results suggest that adverse market conditions limit the adoption of fertilizer-based technologies, especially among resource-poor households. Farmers appear to respond to market signals in the aggregate and this provides a pathway for subsidies to stimulate demand. However, the research suggests that lowering transaction costs, through investments in infrastructure and market institutions, can generate deeper effects by expanding the technologies available to farmers across all pricing outcomes.

Keywords: Environmental Economics&Policies; Climate Change and Agriculture; Markets and Market Access; Fertilizers; Economic Theory&Research (search for similar items in EconPapers)
Date: 2013-10-01
New Economics Papers: this item is included in nep-afr, nep-agr, nep-env and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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