Are middlemen facilitators or barriers to improve smallholders' welfare in rural economies? Empirical evidence from Ethiopia

Middlemen play an important role by linking farmers to traders and final markets. This is particularly the case in developing countries, where market failure is ubiquitous and food chains still consist of many stages. This paper analyzes the factors affecting the farmers' decision to trade through middlemen and the impact of this choice on income and commercialization. We conceptualize middlemen both as an economic institution and as a social network structure. On the basis of data from 345 farmers in Ethiopia we found that several socioeconomic variables - particularly age, education, farm size, wealth and location - and social network variables - notably ethnic and religious ties - have an influence on farmers' choice of sales arrangement. Regarding income effects, gross profit was 225% higher for farmers without intermediation. This could be explained by the latter farmers having access to better quality inputs, better contract specifications and receiving higher prices for their products. Nonetheless, the majority of farmers continue trading via middlemen. We suggest three explanations for this outcome. First, wholesalers seem to prefer to work with middlemen to guarantee minimum quantity and quality, and to reduce the cost of measuring quality. Second, personalized relationships might lock-in smallholders into trading through middlemen regardless of income losses. Third, trading via middlemen can enhance smallholder commercialization by linking low resource endowed farmers to traders and final markets. However, direct trading with wholesalers seemed beneficial for relatively better-resource endowed farmers.