Why do developing countries fail to specialize in products in which they appear to have a comparative advantage? We propose a model of agricultural trade with intermediation that explains how hold up resulting from poor contracting environments can produce such an outcome. We use the model to explore the role of production subsidies, support prices, easing sanitary and phytosanitary (SPS) requirements, and the creation of local markets in resolving the hold up problem. The model highlights the importance of infrastructure in aligning production outcomes with comparative advantage and sheds light on the pass-through of the world price to the producer.
All Science Journal Classification (ASJC) codes
- Economics, Econometrics and Finance(all)