Does Digital Divide or Provide? The Impact of Cell Phones on Grain Markets in NigerJenny C. AkerUniversity of California, BerkeleyJOB MARKET PAPERDecember 1, 2007Abstract. Between 2001 and 2006, cell phone service was phased in throughout Niger, providing an alternative and cheaper search technology to grain traders and other market actors. We construct a novel theoretical model of sequential search, in which traders engage in optimal search for the maximum sales price, net transport costs. The model predicts that cell phones will increase traders’ reservation sales price and the number of markets over which they search, leading to a reduction in price dispersion across markets. To test the predictions of the theoretical model, we use a unique market and trader dataset from Niger that combines data on prices, transport costs, rainfall and grain production with cell phone access and trader behavior. We first exploit the quasi-experimental nature of cell phone coverage to estimate the impact of the staggered introduction of information technology on market performance. The results provide evidence that cell phones reduce grain price dispersion across markets by a minimum of 6.5 percent and reduce intra-annual price variation by 10 percent. Cell phones have a greater impact on price dispersion for market pairs that are farther away, and for those with lower road quality. This effect becomes larger as a higher percentage of markets have cell phone coverage. We provide empirical evidence in support of specific mechanisms that partially explain the impact of cell phones on market performance. Robustness checks suggest that the results are not driven by selection on unobservables, nor are they solely a result of general equilibrium effects. Calculations of the four-firm concentration index suggest that the grain market structure is competitive, so the observed reductions in price dispersion are not due to greater market collusion. The primary mechanism by which cell phones affect market-level outcomes appears to be a reduction in search costs, as grain traders operating in markets with cell phone coverage search over a greater number of markets and sell in more markets. The results suggest that cell phones improved consumer welfare during Niger’s severe food crisis of 2005, perhaps averting an even worse outcome. Key words: Information, Search Costs, Cell Phones, Food Crisis, Niger. 207 Giannini Hall #3310, Berkeley, CA 94720. Tel: (510) 219-1663. Email: [email protected]. This research was partially funded by Rocca Dissertation Fellowship, Catholic Relief Services, CARE, World Vision, the Ford Foundation, UC-Berkeley’s CIDER, the World Bank and USAID. I am grateful to Lisa Washington-Sow, Ali Abdoulaye, Ousseini Sountalma and the data collection team for their support and patience in Niger. I would like to thank Maximilian Auffhammer, Yanay Farja, Guido Imbens, Alain de Jainvry, Kristin Kiesel, Edward Miguel, Elisabeth Sadoulet, Abdoulaye Sy, Jesse Tack, Brian Wright, Muzhe Yang, and seminar participants at UC Berkeley, UC Davis and the BWPI/University of Manchester poverty workshop for excellent comments on theoretical and empirical issues. I am indebted to Maximilian Auffhammer for his invaluable advice and patience. All errors are my own.1“[With a cell phone], in record time, I have all sorts of information from markets near and far…”Grain trader in Magaria, Niger11. IntroductionThe importance of information for the effective functioning of markets has been a central concern of economic theory for some time (Jensen 2007). Since Stigler’s seminal work on the “Economics of Information” (Stigler 1961), a large body of literature has emerged, in an effort to explain how asymmetric information and costly search can explain equilibrium price dispersion for homogeneous goods. Due to limited or costly information, price dispersion across markets is common in developed and developing countries. The purpose of this paper is to estimate the impact of the introduction of a new search technology on dispersion in grain prices for one of the world’s poorest countries, Niger. The linkages between costly search and market efficiency are important for welfare in Sub-Saharan Africa, and particularly Niger. With a per capita GNP of US$170 and an estimated 63 percent of the population living below the poverty line, Niger is the lowest-ranked country according to the United Nations’ Human Development Index (HDI). The majority of the population consists of rural subsistence farmers, who depend upon rainfed agriculture as their main source of income. Grains (primarily millet and sorghum) are dietary staples, accounting for over 75 percent of food consumption (FAO and ICRISAT 1996). These commodities are transported from farmers to consumers through an extensive system of markets that run the length of the country, which is roughly three times the size of California. As grain markets occur only once per week, traders have historically traveled long distances to potential sales markets to obtain information on supply, demand and prices.In 2005, Niger suffered from a severe but localized food crisis, with grain prices representing more than 27 percent of per capita income. Price dispersion among markets in food crisis regions was 20 percent higher than in non-crisis regions.2 At the time, only 24 percent of the markets in food crisis regions had cell 1Based upon interviews with the author during the Niger trader survey of 2005/2006. The original quotation (from Hausa to French) is the following: “(Avec le cellulaire), en un temps record, j’ai les informations de toutes sortes sur les marchés proches et lointoins…” 2 A supplementary appendix of tables and figures (primarily for results “not shown”) is available at https://www.are.berkeley.edu/~aker2phone coverage, as compared to 83 percent of markets in non-crisis regions. This striking pattern suggests a potentially causal relationship between costly search, information asymmetries and price dispersion, one that this paper explores in great detail. Cell phone service was phased-in throughout Niger between 2001-2006. 75 percent of grain markets had cell phone coverage by 2006, with 29 percent of traders surveyed using cell phones for their