Tropentag, October 5 - 7, 2004 in Berlin "Rural Poverty Reduction through Research for Development and Transformation"

Adverse Selection Problems in Developing Country Factor Markets: Fertilisers in Cambodia

Humboldt-Universität zu Berlin, Institute of Agricultural Economics and Social Science, Germany

Abstract

Developing country factor markets are often fragmented and inadequately reflect supply and demand conditions. Studies analysing agricultural factor markets in developing countries have cited information deficiencies as an important reason for factor market inefficiencies. In this paper, we analyse the presence and potential impact of low quality fertilisers, inadequate access to credit and market information on fertiliser market participation and application rates. We explain using game theory that bad quality fertiliser negatively affects the market for higher quality fertilisers. It deters all buyers not willing to pay the market price for the average quality fertiliser available. Empirically, using data from a survey of 82 farmers in seven different regions of Cambodia, we show that farmers chose to abstain from the fertiliser market altogether or decrease their application rates below recommended levels. First, we estimate a logistic model to test the significance of factors influencing the decision to abstain from the fertiliser market including prior experience with low quality fertilisers (adulteration), inadequate access to credit and regional market participation. We confirm positive relationships between the decision to abstain and the credit and adulteration variables. We also confirm a negative impact of regional market participation because regional traders are thought to be relatively trustworthy when many other farmers in the region also choose to participate in the market. In a second, multivariate regression, we estimate the impact of the indicators for adulteration, credit access, and whether farmers have access to market information as well as a categorical regional dummy variable on urea application rates per hectare. Adequate access to credit and adequate market information both increase urea application (by about 29 and 32 kg per ha, respectively) whereas having obtained bad quality fertilisers in the past (adulteration) decreases urea application rates (by about 22 kg per ha). The regional impacts amount to decreases in urea consumption between 40 and 60 kg per ha relative to the base region (Kandal).

Keywords: Adverse selection, asymmetric information, quality

Contact Address: Guenter Schamel, Humboldt-Universität zu Berlin, Institute of Agricultural Economics and Social Science, Luisenstraße 56, 10099 Berlin, Germany, e-mail: g.schamelrz.hu-berlin.de