Transactions Costs and Agricultural Household Supply Response

Abstract We develop and estimate a model of supply response when transactions costs create a situation where some producers buy, others sell, and others do not participate in markets. We present two rationales for why producing households may have different relationships to the market: proportional and fixed transactions costs. Using data on Mexican corn producers, we estimate an empirical model that allows for separate tests of the significance of both types of transactions costs, revealing that both fixed and proportional transactions costs matter for the estimation. The results provide consistent estimates of supply elasticity and measures of the relative importance of factors determining both proportional and fixed transactions costs.