Alternative bargaining model between farmers and brokers

Yangxuan Liu, Purdue University

Abstract

The vegetable market between farmers and brokers in China is neither efficient nor competitive. Brokers have market power and access to market information to dominate the price of the products. The farmers lack the information about the market price of the product and are selling a perishable product. Asymmetric information can cause a hold-up problem between farmers and brokers. ^ This thesis proposes two different bargaining rules each to deal with incomplete information market and complete information market. The thesis also studies how different bargaining roles can affect efficient investment decisions by farmers and distribution of payoffs to farmers. ^ There are three major findings in this thesis. First, when the farmer does not have bargaining power, the entire surplus from trade is obtained by the broker. Thus the farmer will not produce for commercial production and this implies that the level of production is only for household consumption. Extra information about the price of perishable products will not increase the distribution of payoffs to the farmer or influence the quantity produced by the farmer. Second, when the farmer has the bargaining power, the farmer can share a proportion of surplus from trade, so that there will be commercial production. Also, additional price information will increase the distribution of payoffs to the farmer and also influence the quantity produced by the farmer. Moreover, there are potentially some instances where bargaining breaks down between farmers and brokers with incomplete information about the market. Efficiency is lost if and when bargaining breaks down.^

Degree

M.S.

Advisors

Steven Y. Wu, Purdue University.

Subject Area

Economics, General|Economics, Agricultural

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