Estimating Impact in Partial vs. General Equilibrium

The bulk of empirical work using microdata, particularly in development economics, engages in partial equilibrium comparisons. Although general equilibrium interactions can offset or even reverse sensible partial equilibrium conclusions, they also require variation in exposure at the level of the economy; i.e. the general equilibrium effects must take place at the local level, to be credibly estimated using micro econometric approaches. Thus, most policy evaluation studies focus on impact in partial equilibrium.

Finding a way to boost agriculture production in sub-Saharan Africa

This study provides an example where sensible conclusions made in partial equilibrium are offset by general equilibrium effects. We study the impact of an intervention that distributed information on urban market prices of food crops through rural radio stations in Uganda. Using a differences-in-differences approach and a partial equilibrium assumption of unaffected urban market prices, we conclude that the intervention led to a substantial increase in average crop revenue for farmers with access to the radio broadcasts, due to higher farm-gate prices and a higher share of output sold to traders. This result is consistent with a simple model of the agricultural market, where a small-scale policy intervention effects the willingness to sell by reducing information frictions between farmers and rural-urban traders. However, as millions of farmers received the radio broadcasts, the intervention had an aggregate effect on urban market prices, thereby falsifying the partial equilibrium assumption and conclusion. Instead, and consistent with the model when the policy intervention is large-scale, market prices fell in response to the positive supply response by farmers with access to the broadcasts, while crop revenues for farmers without access decreased as they responded to the lower price level by decreasing market participation. When taking the general equilibrium effect on prices and farmers without access to the broadcasts into account, the conclusion is the intervention had no impact on average crop revenue, but large distributional consequences.

This study finds that price information plays an important role in facilitating market exchange. The functioning of agricultural markets is central to the development of low-income countries. How to boost agriculture production in developing countries has been an ongoing policy question. The question is of particular importance for countries in sub-Saharan Africa where the growth in agricultural yield has been stagnant.

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Program area
Economic Development, Growth, General Equilibrium Effects, Agricultural Production
Swedish International Development Agency, Department for Research Cooperation, Handelsbanken’s Research Foundations
Study type
Natural experiment
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Jakob Svensson
IIES, Stockholm University
David Yanagizawa-Drott
Zurich CED

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