Transaction Costs and Market Institutions: Grain Brokers in Ethiopia

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(S -i ) of other traders in the same market capture these effects. Thus, the trader’s
share of long-distance trade in total transactions is represented as
(4) D i,t = α 0 + α 1 ω* + α 2 ν*+ α 3 γ + α 4 P -i + α 5 S -i + u 1
D i,t = 0 otherwise
Traders who have chosen to trade long-distance in the central market are faced
with a second choice, in the presence of brokers. Each trader evaluates the
expected gains from searching directly without a broker with the expected gains
from using a broker. A trader’s net profit from searching directly is a function of
his or her individual transaction costs of search, social capital, and the time he or
she requires to find a buyer or seller in the distant market (τ). A general form for
a trader’s net profit function from direct search is Π i
d
= Π(γ i ,ω i ,ν i ,τ i ).
When a
trader uses a broker, his or her net profit no longer depends on the trader’s
opportunity cost of search labor, social capital, or time that he or she requires to
find a buyer or seller. Instead, the trader’s net profit from using a broker is a
function of the broker’s social capital (γ b ), the broker’s commission (k), the
trader’s opportunity cost of tying up his or her working capital, and the time
required for the broker, rather than the trader, to complete the search (τ b ). A
general form for a trader’s net profit from using a broker is Π b i = Π(γ b , k,ν i , τ b ).