Abstract

In developing countries, due to high transport costs, the lack of reliable price information, and the inability to verify the quality of produce, farmers who pro-duce cash crops are often exploited by intermediaries. There is growing recogni-tion among economists and policymakers that this lowers farmer’s profitability and reduces incentives to produce and control quality thereby leading to an adverse effect on both equity and efficiency (Pranab Bardhan 1989; Jason Clay 2004). In the case of soybeans, a major cash crop in the central Indian state of Madhya Pradesh, farmers sell their produce to traders operating in government regulated wholesale agricultural markets, called mandis. The traders, in turn, sell to process-ing companies. There are approximately 230 main mandis in the state where farmers periodically sell their produce through an open outcry ascending bid auction. The auction begins when a government employee visually inspects the quality and sets the initial bid. From here, the traders bid upward until the crop is sold. Government regulated mandis were explicitly established to protect farmers, and open auctions were considered the best safeguard against excessive trader’s influence. However, the ability to collude among a relatively small number of traders in each mandi led to the extraction of a significant share of profits leaving little for the farmer who had no alternative method of selling (David Upton and Virginia A. Fuller 2003).