UC Davis

Drawing on theory from development economics and industrial organization, I study the economics of rural firms and markets to understand how different types of shocks affect firm operations. I examine three types of shocks: technology, weather, and prices. I use a combination of randomized experimental variation and quasi-experimental variation to identify the effect of each type of shock on small firm outcomes. The primary outcomes are relational contracting with suppliers and customers, firm performance (sales, profits, hiring of workers), number of competitors, and changes to input and output prices.

In the first essay, I evaluate how a technology shock designed to lower search costs affects how firms interact with their suppliers and customers. For small firms, search frictions interfere with learning about new suppliers in their upstream market, and raise the cost of meeting new customers in their downstream market. Using a randomized experiment of 507 small firms, I study the impact of a digital phonebook that lowers the cost of accessing new business and customer contacts. Participating firms are split into a control and treatment group with two variations: 1) a phonebook listing that is visible to upstream suppliers in urban areas, and 2) a phonebook listing that is visible to downstream customers in rural areas. I find that treated firms increase relational contracting with their suppliers and decrease it with their customers. Yet, there is no strong evidence that the number of new customers or suppliers increases. This pattern suggests that being listed in the phonebook caused firms to update their valuation of relational contracts and respond by negotiating better terms with suppliers and customers.

In the second essay, I study how a weather shock that lowers agricultural production affects rural firms whose customer base experiences crop losses. In the absence of insurance and credit markets, the effect of adverse weather shocks on rural firms is ambiguous because drought shifts both demand and supply curves. I use spatial and temporal variation in the 2016-2017 drought in Kenya to characterize the direct and indirect effects of drought-induced food insecurity on local firm outcomes. Firms in areas directly affected by drought have lower sales, profits, and hire fewer workers than firms in non-drought areas. Firm entry also increases in drought areas compared to non-drought areas, consistent with prior evidence that farming households form new businesses as a coping strategy following shocks. Subsector analysis reveals substantial heterogeneity. Service firms fare better than retail firms. But examining retail sub-sectors shows that firms selling higher-value food products (meat/fish and fruits/vegetables) experience greater declines than staple grain sellers in markets directly affected by drought, while firms selling high-value foods increase sales in non-drought areas. This is consistent with consumers in drought regions decreasing consumption of non-necessities.

In the third essay, I explore how input price shocks passthrough to consumer prices for rural and urban firms. Price variation is a typical feature of markets in developing countries. Rural firms face substantial price variation when purchasing goods (inputs) that they re-sell as outputs. How much of this input variation passes through to prices for rural customers? Rural households rely on local businesses to purchase household food staples and other essential commodities. Yet, relatively little economic literature examines retail passthrough rates of these essential food staples to clarify how it affects local food security. I use a panel of input and output prices for 230 urban firms and 240 rural firms to evaluate passthrough from idiosyncratic input price shocks on key commodities sold through urban-to-rural supply chains. I find that rural firms smooth both negative and positive input price shocks more than urban firms. By exploring possible mechanisms, I find suggestive evidence that smaller community size is associated with lower output prices, suggesting that social ties may play a role. At the same time, competitive pressure matters as well - rural firms who face new entrants and have higher absolute number of competitors have higher passthrough rates, consistent with a competitive market framework.