How does Market Access affect Smallholder Behavior? The Case of Tobacco Marketing in Malawi

Transaction costs play a key role in the behaviour of smallholders in developing countries. We exploit the introduction of an additional tobacco auction floor in Malawi to investigate the impact of a reduction in transaction costs and improved market access on production per hectare and the underlying smallholder’s decisions on production and cultivated area of tobacco, the major cash crop in Malawi. Given the non-experimental nature of the data we use matching and potential outcome models to identify impact. Estimations are based on annual data by Extension Planning Area, 198 in total, fully covering Malawi, for the period 2003-04 to 2009-10. The estimation results support a statistically significant positive impact of the introduction of a new auction floor on smallholders’ behaviour: production per hectare, production and area of tobacco has increased in the long run with respectively 20-25%, 36-38% and 15-21%. This outcome, and the increase in cultivated area in articular, suggests that lower transaction costs trigger smallholder farmers to shift to commercial agriculture.