The impact of market failures on household behavior: Explaining labor market segmentation, technology adoption patterns and transaction costs in rural Peru

The existing economic literature on transaction costs and market failures illustrates how they alter economic behavior by reducing market participation and affecting the response to policies of heterogeneous populations. Still, empirical work has often been inadequate and unable to capture the non-trivial intricacies and complications that arise by introducing them in statistical analyses.;This dissertation, divided into three chapters, addresses this gap. The first chapter proposes a theoretical model of farm households that participate in the labor market. The aim is to identify those households that are potentially constrained in their off-farm labor allocation and those that are not. Using mixture distribution estimation techniques we find two regimes among market-participating households depending on whether the off-farm labor allocation constraint is binding or not. The results also suggest that labor markets in Peru are segmented and that aspects like ethnicity, gender, as well as regional attributes such as the level of unemployment or low population density can prevent market integration.;The second chapter examines the relationship between credit market failures, technology adoption, and income portfolio diversification. Using a semi-structural approach, we show that income diversification can complement the adoption of new technologies by relaxing cash liquidity constraints. This finding is the reverse of the existing literature on adoption, which posits that changes in the agricultural product mix are a result of adoption of new technologies.;Finally, the third chapter attempts to measure the magnitude and role of different types of transaction costs on behavior. A market search model that incorporates both variable and fixed transaction costs is developed to understand how farmers choose where to sell their marketed surplus. The empirical findings show that, in addition to distances and access to good road infrastructure, a number of other transaction costs attributes such as information about markets and prices, relationships with buyers, as well as bargaining abilities also affect market choices. As such, these results suggest that policies aiming at reducing transaction costs should address not only road and infrastructure but also create mechanisms to enhance information flows and bargaining.