DP8615 | Intermediaries, transport costs and interlinked transactions

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Transport costs play a key role in agricultural markets in developing countries and are one of the causes of poverty amongst farmers that are geographically isolated. Another characteristic of agricultural markets is that they often involve interlinked transactions. However, the existing theoretical literature on interlinked transactions does not take into account the existence of transport costs. This paper develops a model of input-output interlinked contracts between geographically dispersed farmers and a trader, whether this trader is for-profit or non-profit. We derive implications of imposing either uniform or mill pricing policies, as opposed to spatial price discrimination. Impact on profit, farmers' income, level of production, social welfare and regional disparities are investigated.