Market integration in Mozambique: A non-parametric extension to the threshold model

Bjorn Van Campenhout
International Food Policy Research Institute/ Mozambique Strategy Support Program

A well-integrated market system is central to a well-functioning market economy (Dercon, 1995). As production decisions are based on observed prices, the most efficient allocation of resources would come about when prices represent scarcity conditions. In other words, a large network of markets connected by fast and efficient arbitrage is needed in order to exploit spatial comparative advantages (Fackler and Goodwin, 2001).

Apart from this general reason, well connected markets are also important for food security. Indeed, the answer to the question how long an initially localized scarcity can be expected to persist entirely depends on how well this market is integrated into the wider economy (Ravallion, 1986). While a better integrated market may experience more volatility (since now price changes in further away markets will also influence the price in the market), extreme prices (both low and high) will be less extreme and less common (as a price increase will attract more traders from further away and price decreases will lead to exports to places further away). The price risk in a particular location will be spread over a larger geographical area when markets become better integrated.

Publication date
Source / Citation
Van Campenhout, B. "Market integration in Mozambique: A non-parametric extension to the threshold model," IFPRI/MozzSSP Working Paper No. 4, November 2012.