Working Paper: NBER ID: w20630
Authors: Kala Krishna; Lena Sheveleva
Abstract: Why do developing countries fail to specialize in products in which they appear to have a comparative advantage? We propose a model of agricultural trade with intermediation that explains how hold-up resulting from poor contracting environments can produce such an outcome. We use the model to explore the role of production subsidies, support prices, easing sanitary and phyto-sanitary (SPS) requirements, and the creation of local markets in resolving the hold-up problem. The model highlights the importance of infrastructure in aligning production with comparative advantage and sheds light on the pass-through of the world price to the producer.
Keywords: Agricultural Trade; Intermediation; Contracting; Comparative Advantage; Production Subsidies
JEL Codes: O12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| poor contracting environments (D86) | holdup problems (D86) |
| holdup problems (D86) | inefficient specialization patterns (F12) |
| production subsidies (H23) | elimination of bad equilibrium (D51) |
| local markets (D40) | alleviation of holdup problem (D86) |
| infrastructure improvements (H54) | alignment of production with comparative advantage (F12) |