Transaction Costs and Market Institutions: Grain Brokers in Ethiopia

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4. TRADERS’ SEQUENTIAL CHOICE AND USE OF BROKERS
In constrained market environments, long-distance trade involves high
coordination costs and considerable risk. Each trader is faced with the choice of
incurring higher search costs by trading in a distant market or trading locally, in a
familiar market, where search costs are relatively low but opportunities are
limited. In Ethiopia, grain wholesalers in regional market centers, located 300 to
500 kilometers from the central market, can either transact locally in their own
market towns or trade in the distant central market. This choice is partly
determined by the type of region in which traders are based. Wholesalers
located in surplus production regions tend to purchase grain locally from smaller
traders and farmers and sell this grain in the distant central market. Wholesalers
located in the deficit regions tend to procure grain from the central market and to
sell it locally to retailers and consumers (Table 2). Because long-distance
transactions entail higher search costs and are enhanced by larger endowments
of social capital, the choice to trade in a distant market is endogenous to each
trader’s unique search costs and social capital. A trader’s share of long-distance
transactions depends on his or her opportunity costs of search labor and of
working capital, social capital, as well as market-level effects, such as the
trader’s location. The average share of long-distance purchases (P -i ) and sales