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Incomplete Credit Markets and Commodity Marketing Behaviour

Authors

  • Emma C. Stephens,

  • Christopher B. Barrett

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    • Emma Stephens is Assistant Professor of Economics, Pitzer College, Claremont, CA, USA. E-mail: emma_stephens@pitzer.edu for correspondence. Christopher Barrett is Stephen B. & Janice G. Ashley Professor of Applied Economics and Management, Charles H. Dyson School of Applied Economics and Management, Cornell University. The authors acknowledge with gratitude support from the Rockefeller Foundation, the United States Agency for International Development (USAID), through grant LAG-A-00-96-90016-00 to the BASIS CRSP and the Strategies and Analyses for Growth and Access (SAGA) cooperative agreement, number HFM-A-00-01-00132-00 and the Coupled Natural and Human Systems Program of the Biocomplexity Initiative of the National Science Foundation, through grant BCS #0215890, as well as the Tegemeo Institute of Agricultural Policy and Development, which graciously made the data available. They are also grateful to Marc Bellemare, Diansheng Dong, George Jakubson, Hyejin Ku, Fidan Kurtulus, Carol Murphree, Chuck Nicholson, Kerry Papps, Elisheba Spiller, Steven Yen and audiences at Buffalo State College, Cornell University, University of Delaware, Pitzer College and at the 2006 Annual Meetings of the American Agricultural Economics Association and the Northeastern Universities Development Consortium for invaluable comments and suggestions. The views expressed here and any remaining errors are the authors’ and do not represent any official agency.


Abstract

We use a simple theoretical model of seasonal market participation in the presence of liquidity constraints and transaction costs to explain the ‘sell low, buy high’ puzzle in which some households do not take advantage of inter-temporal price arbitrage through storage and sell output postharvest at prices lower than observed prices for purchases in the subsequent lean season. We test our model with data from western Kenya using maximum likelihood estimation of a multivariate sample selection model of market participation. Access to off-farm income and credit indeed seem to influence crop sales and purchase behaviours in a manner consistent with the hypothesised patterns.

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