The role of intermediaries in enhancing market efficiency in the Ethiopian grain market

This paper investigates the impact of the institution of brokerage on the optimal search behaviour and the welfare gains and losses of traders in the Ethiopian grain market. Without brokers, the privately optimal search diverges from the socially optimal search due to the positive spill-over of individual search behaviour. Numerical analysis using the actual distribution of search costs and search efficiency obtained from primary data collected in Ethiopia reveals that this externality is partially internalised by the presence of brokers and that total welfare increases significantly due to a more efficient allocation of search effort.© 2001 Elsevier Science B.V. All rights reserved