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Wheat or Strawberries? Intermediated Trade with Limited Contracting.

Kala Krishna, Lena Sheveleva

NBER Working Paper No. 20630
Issued in October 2014, Revised in January 2016
NBER Program(s):Development Economics Program

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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Document Object Identifier (DOI): 10.3386/w20630

Published: Kala Krishna & Yelena Sheveleva, 2017. "Wheat or Strawberries? Intermediated Trade with Limited Contracting," American Economic Journal: Microeconomics, vol 9(3), pages 28-62.

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