The Ethiopian Commodity Exchange and Spatial Price Dispersion

In this article, we study the impact of an institutional intervention on market efficiency in Ethiopia. More specifically, we study whether regional warehouses that are connected to a national commodity exchange reduce transaction costs and price dispersion between regions. In order to identify the causal effect, we take advantage of the fact that the warehouses that are connected to the Ethiopian Commodity Exchange were sequentially rolled out. Using retail price data and information about warehouse operation from 2007 to 2012, we find that the average price spread between market pairs is reduced by 0.86-1.775 ETB when both markets have an operating warehouse. This is a substantial reduction considering that the average price spread over the full period is 3.33 ETB.