Working Paper Series

Measuring Transactions Costs from Observed Behavior: Market Choices in Peru


  • Alain de Janvry, Goldman School of Public Policy, University of California, Berkeley
  • Elisabeth Sadoulet, University of California, Berkeley
  • Renos Vakis,


  • Goldman School of Public Policy Working Paper (October 2003)


Farmers incur proportional and fixed transactions costs in selling their crops on markets.
Using data for Peruvian potato farmers, we propose a method to measure these transactions costs.
When opportunities exist to sell a crop on alternative markets, the observed choice of market can be
used to infer a monetary measure of transactions costs in market participation. The market choice
model is first estimated at the reduced form level with a conditional logit, as a function of variables
that explain transactions costs. We then use these market choice equations to control for selection in
predicting the idiosyncratic prices that would be received on all markets and the idiosyncratic
proportional transactions costs that would be incurred to reach all markets. The net between the two
gives us a measure of effective farm-level prices. This allows us to estimate a semi-structural
conditional logit of the market choice model. In this model, the choice of market is a function of
predicted effective farm-level prices, and of market information that accounts for fixed transactions
costs. We can use the estimated coefficients to derive the price equivalence of the fixed cost due to
information. We find that the information on market price that farmers receive from their neighbors
reduces fixed transactions costs by the equivalent of doubling the price received, and is equal to four
times the average transportation cost.

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