From Bilateral Trade to Centralized Markets: A Search Model for Commodity Exchanges in Africa

Several African countries have recently centralized their agricultural markets by launching a commodity exchange. What will be the impact of such a move? Who will be the winners and the losers? We develop a simple search model to study the impact of introducing a commodity exchange in a village economy where traders and farmers exchange on a bilateral basis. We study the efficiency gains from moving from the status quo to a trading regime where farmers have the option of selling their produce to a commodity exchange. We describe how the gains from trade are distributed between farmers, traders and the commodity exchange itself. We show that a dual economy where farmers sell both to the bilateral and the commodity exchange can exist in equilibrium, and that forcing all farmers to sell into the commodity exchange can make some farmers worse off.

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World Bank Economic Review, Vol. 31, No. 3

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