Wheat or Strawberries? Intermediated Trade with Limited Contracting
41 Pages Posted: 27 Oct 2014 Last revised: 16 May 2021
Date Written: October 2014
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.
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