Why Agricultural Value Chains Fail? A Transaction Cost Explanation

Posted by on November 22, 2016  /  0 Comments



Research shows many reasons for agricultural value chains to fail. Some popular reasons are: lack of motivation, lack of financial strength, lack of planning, little evaluation of market opportunities and even lack of business management skills. However I argue that transaction costs are the main reasons for agricultural value chains to fail. LIRNEasia’s research work on transaction costs dates back to 2006. These research works looked at identifying key transaction costs in agricultural value chains, especially the smallholder vegetable growers associated with the largest wholesale market of the country. The Objective of the study was to look at possible ICT interventions that can minimize the transaction costs associated with the smallholder vegetable growers. http://lirneasia.net/projects/2006-07/icts-transaction-costs-traceability/.

In theory there are two types of transaction costs. First are the ex-ante transaction costs, first proposed by Economist Ronal Coase. In simpler terms: we could term these as ‘writing down costs’ or ‘haggling costs’. The justification is that if these costs were really high then the business activities would not happen. Second are the ex-post transaction costs. These costs occur after a farmer finds a trader and agrees on the ex-ante costs. These transactions costs can also be characterized by popular economic phenomenon such as bounded rationality and information asymmetry. Simpler ways to describe these costs are as contract negotiation and re-negotiation costs connected to investment made by the farmer and/or the buyer. Read more on this from below link.



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