Supply Response, Market Participation and Transaction Costs in Food Markets: Evidence from a Tanzanian Panel

This paper analyses the role barriers to trade in the form of high transaction costs have on market participation and supply response in rural food markets in developing countries. We present an empirical application on a sample of households in the Tanzanian region of Kagera. Exploiting the availability of a long term panel dataset to develop an error components switching regression model we can take into account individual unobserved heterogeneity. The results show the importance of households’ heterogeneous market participation for the estimation of supply response and confirm the role of transaction costs in orienting households toward a lower degree of specialization. JEL classification: O13, Q12, Q18