Input and Output Market Inefficiencies  

 

Problems with infrastructure and supply chains make it costly for farmers to access markets.

Subsidies to overcome input and output market inefficiencies.

Infrastructure and Diffusion of Technology

Farmers who would benefit from technology adoption may be unable to access or pay for the technology due to inadequate infrastructure, missing supply chains or unprofitably high prices. Infrastructure, such as roads and irrigation, plays a key role in facilitating technology adoption, but infrastructure investment is typically left to governments and donors, because it is hard for private actors to profit from the development of public infrastructure. Cross-country evidence on the effect of infrastructure on agricultural productivity shows a positive relationship between productivity and the development of roads and irrigation. Improved transportation is also associated with diffusion of technology, better use of inputs and better prices for farmers.

Poor Infrastructure and Market Power

In many places, a lack of infrastructure drives a wedge between the prices that farmers receive for their output and the market price, lowering the profits associated with certain technology adoption. Landlocked countries in particular face high costs associated with the import and export of agricultural products. Transportation can account for half of the cost of agricultural output marketing—a considerable fraction of the value of the product.

Transport and other infrastructure challenges is thought to reduce competition among input suppliers and among middlemen. This leaves individual farmers with little room to bargain, because input suppliers and output buyers face little competition. In these cases, much of the profit from improved agricultural technologies may be captured by market actors other than the farmer. By raising the fixed cost of distribution, poor infrastructure increases the market power of intermediaries. This can lead to a vicious cycle, with low take-up resulting in a few market actors holding a great deal of market power, which lowers profits for farmers and can further depress the take-up of new technologies.

Private vs. Public Sector Distribution

Private sector distribution networks may turn out to be more efficient than public sector distribution, as the private sector is motivated by profits, which provides an incentive to be reliable and to meet farmers’ needs. Related evidence on absenteeism among public sector employees highlights these incentive problems. However, some inputs are not amenable to private sector distribution. For example, the distribution of technical expertise, such as information that can be freely shared, may require public sector support due to the lack of profit opportunity for the private sector.

Agricultural extension services is a leading example of the challenges associated with public sector distribution. These workers must cover large areas with poor infrastructure and widely varying microclimates. In addition, their work is difficult to monitor and they are rarely held accountable for outcomes. Consequently, they may have little direct incentive to show up for work or complete their duties. Of course, extension workers may be otherwise motivated; however, further research is needed on how to improve agricultural extension services in South Asia and Sub-Saharan Africa.

Adoption constraints may be overcome by interrupting the cycle of poorly functioning input and output markets that lead to low demand for agricultural technologies and hinder market function. The need to interrupt this cycle provides a rationale for targeted subsidies that can stimulate demand and generate the initial volume required to set up distribution networks and lower costs. At the same time, if those who receive a subsidy would have taken up the product anyway, then the subsidy is wasted. Better targeting of subsidies, by using characteristics of the household or farmer, or through vouchers may improve subsidy programs, however more research is needed.

In newly funded ATAI research, Duflo, Kremer, and Robinson will explore the distribution of subsidies through local social groups such as churches and schools. This approach allows for targeting of the subsidies and also decreases the cost of distribution. Findings from the study may identify a scaleable approach to subsidizing socially beneficial agricultural technologies in the face of distribution constraints to adoption. In another newly funded ATAI project, Magruder, Beaman, Yishay and Mobarak will investigate the potential for linking government extension agents in Malawi with the social networks that exist at the village level, improving the distribution of publicly provided agricultural inputs.

Positive Pricing and Demand for Agricultural Technologies

Charging for publicly provided inputs including agricultural extension may help raise revenue and eliminate wastage. However, charging may also result in exclusion of the poor. Literature that tests the effects of pricing on take-up of public health products is inconclusive regarding the effect of pricing on demand: Some evidence suggests that a positive price screens out those least likely to use a technology,1 while other studies find that free provision results in substantially greater take-up, particularly among the very poor2. Understanding the short and long run effects of prices on demand for agricultural technologies is an important direction for new research. A new ATAI project led by Annan, Dixon, Glennerster, Kimmins, and Suri will test whether communities that receive an intial subsidy for new rice varieties are more likely to purchase and plant in future years.

Agricultural Cooperatives

Contracting with groups of farmers (as opposed to just individuals) may also reduce the risk of reneging. For example, smallholder farmer cooperatives and associations allow supermarkets and exporters to contract with a single entity rather than many smallholders, which makes it easier to include poor farmers in modern supply chains. Smallholder participation in output markets has also been successfully facilitated through tied credit, technical assistance and training provided by supermarkets and other downstream purchasers. However, within the cooperative, problems often arise that prevent benefits from being shared evenly. For example, large farmers within the group may use their power to distort the collective’s functioning.

External interventions to provide training on management or negotiation may help improve the performance of farmer organizations. In an ATAI pilot project, De Janvry and coauthors investigate how to improve contract enforcement for these types of arrangements in Senegal. Approaches to improving input and output market efficiency must further engage the private sector as a reliable source of inputs and a provider of reliable output markets.

Monitoring Contract Farmers, Cooperatives and Extension Services

Groups of farmers are more likely to enter into mutually beneficial agreements if defection can be caught through reliable monitoring. Similarly, providers of agricultural inputs, including extension services, can be held accountable if monitoring of their activities is feasible and not too costly. Improving coordination of public service providers has been subject to a fair amount of rigorous research, much of which focuses on the accountability and monitoring of health workers and teachers in developing countries. These studies may offer lessons for improving public agricultural extension provision and other agricultural inputs. For example, a randomized evaluation that used cameras with tamperproof date and time recordings to monitor teacher attendance reduced absences by half, in part by decreasing monitoring costs and depersonalizing the monitoring process.3

In an ATAI funded project in Kenya, Casaburi, Kremer and Mullainathan will test the effectiveness of decentralizing decisions about input purchases to sugar outgrowers. Letting the individual farmers decide what input combinations are most appropriate for their fields and practices can lower monitoring costs and may help overcome input and output market inefficiencies.

1 Ashraf, Nava, James Berry and Jesse M. Shapiro. 2008. “Can Higher Prices Stimulate Product Use? Evidence from a Field Experiment in Zambia.” NBER Working Paper 13247.
2 Kremer, M. and E. Miguel (2007). "The Illusion of Sustainability." The Quarterly Journal of Economics 122(3): 1007-1065.; Cohen, J. and P. Dupas (2010). "Free Distribution or Cost-Sharing? Evidence from a Randomized Malaria Prevention Experiment*." Quarterly Journal of Economics 125(1): 1-45.
3 Duflo, E. and R. Hanna (2005). Monitoring Works: Getting Teachers to Come to School, Massachusetts Institute of Technology.