Lauren Falcao Bergquist Publications

This chapter, prepared for the Handbook of Development Economics (Vol. 6), reviews recent microeconomic evidence on the causes of resource misallocation in developing countries. It distinguishes between “technological” and “distortionary” wedges, develops a unified theoretical framework linking market power, taxes, financial frictions, and firm dynamics, and summarizes empirical findings from the “direct approach” to misallocation. The authors emphasize how wedges vary by firm size and discuss policy implications for improving allocative efficiency.

African agricultural markets are characterized by low farmer revenues and high consumer food prices. Many have worried that this wedge is partially driven by imperfect competition among intermediaries. This paper provides experimental evidence from Kenya on intermediary market structure. Randomized cost shocks and demand subsidies are used to identify a structural model of market competition. Estimates reveal that traders act consistently with joint profit maximization and earn median markups of 39 percent. Exogenously induced firm entry has negligible effects on prices, and low take-up of subsidized entry offers implies large fixed costs. We estimate that traders capture 82 percent of total surplus.