Proportional Transaction Costs in Rice Marketing: Estimation and Distribution by Institutional Arrangement

Abstract

Agricultural commercialisation is emerging as an important option for achieving agricultural development and reducing poverty in developing countries. However, this option faces a number of barriers, including high fixed and proportional transaction costs. Proportional transaction cost lowers the efficiency of agricultural marketing system, but its measurement remained a challenge and its distribution under different institutional arrangement is not widely explored. Using a transport model, estimated based on data collected from Northern Uganda, proportional transaction cost was estimated and its distribution was also assessed. The estimation found that low proportional transaction costs are incurred by rice producers in Northern Uganda, mainly because of subsidisation of transport cost by rice millers. A lower proportional transaction costs are also incurred under contract institutional arrangement than under spot market and personalised arrangement. These observations reveal useful information about rice milling as one of the points along the rice value chains that policy intervention for improving market access of rice producers can be made, and confirm the importance of contract farming in reducing transaction cost and enhancing access to market.