Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to The Quarterly Journal of Economics. http://www.jstor.org The Digital Provide: Information (Technology), Market Performance, and Welfare in the South Indian Fisheries Sector Author(s): Robert Jensen Source: The Quarterly Journal of Economics, Vol. 122, No. 3 (Aug., 2007), pp. 879-924 Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/25098864 Accessed: 03-07-2015 13:41 UTC Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://www.jstor.org/page/ info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions THE QUARTERLY JOURNAL OF ECONOMICS Vol. CXXII August 2007 Issue 3 THE DIGITAL PROVIDE: INFORMATION (TECHNOLOGY), MARKET PERFORMANCE, AND WELFARE IN THE SOUTH INDIAN FISHERIES SECTOR* Robert Jensen When information is limited or costly, agents are unable to engage in optimal arbitrage. Excess price dispersion across markets can arise, and goods may not be allocated efficiently. In this setting, information technologies may improve market performance and increase welfare. Between 1997 and 2001, mobile phone service was introduced throughout Kerala, a state in India with a large fishing industry. Using microlevel survey data, we show that the adoption of mobile phones by fishermen and wholesalers was associated with a dramatic reduction in price dispersion, the complete elimination ofwaste, and near-perfect adherence to the Law of One Price. Both consumer and producer welfare increased. I. Introduction How do improvements in information impact market perfor mance and welfare? Economists have long emphasized that in formation is critical for the efficient functioning ofmarkets. For example, two of the most well-known results in economics, the First Fundamental Theorem ofWelfare Economics (i.e., compet itive equilibria are Pareto efficient) and the "Law of One Price" (LOP) (i.e., the price of a good should not differ between any two markets by more than the transport cost between them) rely heavily on the assumption that agents have the necessary price information to engage in optimal trade or arbitrage. These results * I thank two anonymous referees, Reuben Abraham, Christopher Avery, Satish Babu, Suzanne Cooper, Peter Cherian, Thomas DeLeire, Edward Glaeser, Sebastian James, C. M. Jolly, X. Joseph, Nolan Miller, C. K. Muhammad, Prakash Nair, Mai Nguyen, M. Philip, P. Philip, Lant Pritchett, V. Rajan, T. K. Sidhique, Joseph Thomas, and Richard Zeckhauser for valuable comments. ? 2007 by the President and Fellows ofHarvard College and theMassachusetts Institute of Technology. The Quarterly Journal ofEconomics, August 2007 879 This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 880 QUARTERLY JOURNAL OF ECONOMICS reflect some of the most fundamental functioning of and advan tages to a market economy; when goods are more highly valued on themargin in one market than another, a price differential arises and induces profit-seeking suppliers or traders to reallocate goods towards that market, reducing the price differential and increas ing total welfare in the process. In reality, however, the informa tion available to agents is often costly or incomplete, as empha sized by Stigler [1961]. In such cases, there is no reason to expect excess price differences to be dissipated or the allocation of goods across markets to be efficient. Yet despite the fact that informa tion is both central to economic theory yet so limited in reality, there are few empirical studies assessing the effects of improve ments in information. Thus, questions such as how much market performance can be enhanced by improving access to information, how much society gains from such improvements, and how those gains are shared between producers and consumers remain largely unanswered. In this paper, we examine these questions by exploiting the introduction ofmobile phones in the Indian state of Kerala as a natural experiment of improved market information. Beyond its prominent place in economic theory, the effect of information on market performance and welfare is also relevant to the debate over the potential value of information and commu nication technologies (ICTs) for economic development. Many critics argue that investments in ICTs should not be a priority for low-income countries, given more basic needs in areas such as nutrition, health, and education.1 However, this argument over looks the fact that the functioning of output markets plays a central role in determining the incomes of the significant fraction of households engaged in agriculture, forestry, or fisheries pro duction in low-income countries; formost of the world's poorest, living standards are determined largely by how much they get for their output. Additionally, the functioning of these markets de termines the prices and availability of food, fuel, and other im portant consumer goods. However, inmost developing countries, markets are dispersed, and communications infrastructure is poor. Producers and traders often have only limited information, perhaps knowing only the price in a handful ofnearby villages or the nearest town, so the potential for inefficiency in the allo cation of goods across markets is great. By improving access to 1. Perhaps ironically, Microsoft's Bill Gates has been among the most prom inent of such critics [Gates 2000]. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 881 information, ICTs may help poorly functioning markets work better and thereby increase incomes and/or lower consumer prices. In fact, it has become increasingly common to find farm ers, fishermen, and other producers throughout the developing world using mobile phones, text messaging, pagers, and the in ternet formarketing output.2 However, while there is some ma crolevel evidence that ICTs promote economic growth [Roller and Waverman 2001], the microlevel evidence has been purely anec dotal. Thus, the case ofmobile phones inKerala will also allow us to examine whether ICTs can play a role in promoting welfare in developing countries; while much has been written about how the uneven spread of ICTs has created a "digital divide" between rich and poor countries, considerably less is known about the benefits such technologies can provide the latter. Fishing is an important industry inKerala. For consumers, fish is a dietary staple [Kurien 2000]; over 70 percent of adults eat fish at least once a day, making it the largest source ofmany important nutrients, such as protein. Further, over one million people are directly employed in the fisheries sector [Government ofKerala 2005]. However, a significant limitation to fish market ing is that while at sea, fishermen are unable to observe prices at any of the numerous markets spread out along the coast. Further, fishermen can typically visit only one market per day because of high transportation costs and the limited duration of themarket.3 As a result, fishermen sell their catch almost exclusively in their local market. In addition, there is almost no storage (due to costs), and little arbitrage on land due to poor road quality and high transportation costs; ultimately, the quantity supplied to a par ticular market is determined almost entirely by the amount of fish caught near that market. Table I provides suggestive evi dence of the resulting inefficiency. The table presents data for fifteen beach markets in northern Kerala, listed in north-south geographical alignment, on average fifteen kilometers apart. The first column provides the prevailing "beach price" (price paid to fishermen by wholesalers or retailers) for a kilogram of sar dines on Tuesday, January 14, 1997, at 7:45 a.m., just before 2. To cite just a few examples from popular media sources, such behavior has been observed in Thailand and the Philippines [Arnold 2001]; Kenya [England 2004]; Congo and South Africa [LaFraniere 2005]; Bangladesh and China [Alam 2005]; and even the case of fishermen in Kerala examined here [Rai 2001]. 3. During the period of study, most beach markets were open only from 5:00 to 8:00 A.M. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 882 QUARTERLY JOURNAL OF ECONOMICS TABLE I Prices and Excess Supply and Demand in Fifteen Sardine Beach Markets Price Excess Excess (Rs/kg) buyers sellers Kasaragod District Hosabethe 6.200 Aarikkadi 4.000 Kasaba 0.004 Kanhangad 7.200 Thaikadappuram 9.7110 Kannur District Puthiangadi 8.720 Neerkkadavu 6.900 Ayikkara 8.410 Thalassery 4.300 NewMahe 6.200 Kozhikode District Chombala 9.9150 Badagara 0.0011 Quilandi 9.8120 Puthiyangadi 0.006 Chaliyam 6.400 Data fromtheKerala Fisherman Survey conductedby theauthor.The firstcolumncontains theaverage 7:45?8:00 a.m. price ofsardines ineachmarket onTuesday, January 14, 1997, inrupees per kilogram.The markets are listedinnorth-southgeographicalignment;startingfromHosabethe, thedistance inkilometers between eachmarket and thenext is: 12, 14, 15, 15, 24, 15, 6, 14, 9, 8, 7, 15, 10, and 16. "Excess buyers" represents thenumber ofbuyerswho leave themarket without having purchased enoughfish,and "excess sellers" is thenumber offishermenwho leave themarket without selling theirfish. the effective market closing. There is a great deal of price varia tion, with some markets having an effective price of zero (fisher men arrive to find all buyers have departed) while others range from 4.0 to as much as 9.9 rupees per kilogram (Rs/kg; $1 US ? 36 Rs). Note in particular that Badagara has a price of zero while Chombala and Quilandi, both within fifteen kilometers, have prices of 9.9 and 9.8 Rs/kg, respectively. Since an average boat on this day was carrying 381 kg offish and the fuel cost of traveling fifteen kilometers was about 205 Rs, a boat arriving at Badagara was forgoing as much as 3,400 Rs in profit. Columns (2) and (3) show this from another perspective, with data on the number of "excess buyers" (wholesalers/retailers who report having bought no fish because of high price or inadequate supply) and "excess sellers" (fishermen who arrive at a market and find no buyers and therefore dump their catch in the sea). The inefficiency is clear; while at Badagara there are eleven fishermen dumping their This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 883 catch unsold, there are twenty-seven buyers within fifteen kilometers who are about to leave without purchasing any fish. Provided there are no other barriers to arbitrage, iffishermen had price information for all locations, the market should achieve an outcome where price dispersion is reduced, fish are allocated across markets more efficiently, waste is reduced or eliminated, and total welfare is increased (though how those gains will be shared between consumers and producers is ambiguous). Beginning in 1997, mobile phone service w^s gradually in troduced throughout Kerala. Since most of the largest cities are coastal, many base towers were placed close enough to the shore that service was available twenty to twenty-five kilometers out to sea, the distance within which most fishing is done. By 2001, over 60 percent of fishing boats and most wholesale and retail traders were using mobile phones to coordinate sales. Thus, the case of Kerala provides an ideal setting for exploring the effects of infor mation on market performance and welfare. Using microlevel survey data spanning this period, we find that price dispersion was dramatically reduced with the introduction ofmobile phones; the mean coefficient of variation of price across markets (the standard deviation divided by the mean) declined from 60-70 to 15 percent or less. In addition, there were also almost no viola tions of the Law ofOne Price once mobile phones were in place, compared to 50-60 percent of market pairs before. Further, waste, averaging 5-8 percent of daily catch before mobile phones, was completely eliminated. Overall, the fisheries sector was transformed from a collection of essentially autarkic fishing mar kets to a state of nearly perfect spatial arbitrage. In addition, fishermen's profits increased on average by 8 percent while the consumer price declined by 4 percent and consumer surplus in sardine consumption increased by 6 percent (though relative to average household expenditure, the latter effect is extremely small). The remainder of this paper proceeds as follows: Section II discusses a simple model that generates predictions for the effects of mobile phones on market performance. Section III discusses the data and empirical strategy. Section IV examines the effects of mobile phones on price dispersion, waste, and adherence to the LOP. Section V provides estimates of the welfare effects, and Section VI concludes. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 884 QUARTERLY JOURNAL OF ECONOMICS II. Information, Price Dispersion, and Welfare IIA. The Model Assume there are two towns along a coastline, each with an equal measure continuum offishermen who leave in the morning and fish in the "catchment zone" near their town. Each fisher man's catch is a random variable with an identical distribution across individuals, but there is positive correlation for fishermen within a catchment zone. Specifically, we assume that a fisher man's catch depends on the density of fish, d, present in their catchment zone on a particular day, where each zone can be in either a high (H) or low (L) density state. The catch forfisherman i thus follows the distribution f(xt\d), where xt takes on values from zero to xmax. f(xt\d) satisfies theMonotone Likelihood Ratio Property, so that ^x^^lfix^L) is increasing in x, i.e., high catches are more likely in the high than low density state. For ease of exposition, we further assume that each zone has an equal probability ofH and L each day, equal to one-half, and that these realizations are independent across zones. At the end of the day, there is a competitive fish market in each town, with many small buyers and sellers.4 We assume the aggregate demand curve P(Q) is identical for the two towns, where Q is the quantity supplied to the market, with P'{Q) < 0. The default option for each fisherman is to sell their catch in their local market. However, they could pay a transportation cost r and sell in the other market (but they can only visit one market per day).5 On observing their own catch, each fisherman updates their assessment of the state of their catchment zone; a higher catch suggests the zone ismore likely to be in a high density (low price) state and raises the possibility they could benefit from 4. In most studies of consumer search (see Stiglitz [1989] for a review), there are many sellers but only one at any particular location; consumers incur a cost for each price quote they wish to receive (i.e., each seller they visit). Each seller then knows that a consumer arriving at their store will only search for an additional quote if the expected price difference exceeds search costs, in effect creating market power for sellers. In the present case, search (by fishermen) is among competitive markets, each with many buyers and sellers, emphasizing the pure arbitrage value of information. In this way, our analysis differs from much of the theoretical and empirical literature on search. 5. In practice, it is rarely possible to visit more than one market per day because markets are open for only a few hours (and travel for boats loaded with fish is time consuming and expensive). Because overnight storage by fishermen, traders, or consumers is prohibitively expensive, fish must be consumed the day they are caught. Markets close early because fish sold later would not have enough time to travel the supply chain from beach to consumer. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 885 selling in the other market.6 The fishermen's problem is tomax imize profits by choosing where to sell their fish.7 Theorem 1. When each fisherman observes only their own catch, there exists a Bayes-Nash equilibrium where 1. there is a threshold jc(t), with jc'(t) > 0, such that all fishermen with catch greater than this value sell in the nonlocal market and all those below sell in the local market, 2. price dispersion between the markets exceeds (per unit) transportation costs when the markets are in opposite states (the prices are equal when they are in the same state), and 3. there is a threshold, t*, above which all fishermen always sell in their local market. The proof is in the Appendix. Theorem 1 is intuitive. When fishermen observe only their own catch, those with the highest catches switch to the nonlocal market both because they assess a higher likelihood of being in an H state and because their high catch yields a greater expected gain in profits for a given expected price difference. Fishermen with lower catches either believe it is more likely they are in a low-density (high price) state, or recog nize that even if they are in a high-density state, fishermen with greater catches will switch markets and reduce the equilibrium expected price difference to where it is no longer profitable for them to switch, given their small catch. For the marginal fisher man who switches markets, the expected equilibrium price difference equals the (per unit) transportation cost, t/x. Since fishermen do not know the state of either zone with certainty, arbitrage is less than the full-information optimum, and the equi librium price differential exceeds transportation costs. As transpor tation costs increase (or itbecomes more difficult to predict a zone's state from one's own catch) there will be less switching and greater price dispersion in equilibrium. In the extreme, there may be no switching because even for the fisherman with the highest catch, the expected gain is less than the transportation costs. 6. We assume x' [P(QL) - P(QH)] > t, 0 < x' < #max, i.e., in the default state there are profitable arbitrage opportunities. 7. We assume fishermen are risk neutral, since in practice this is a high frequency (daily) repeated game and smoothing income or consumption over such short intervals is relatively easy. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 886 QUARTERLY JOURNAL OF ECONOMICS We now introduce a search technology, where for a cost, ^, fishermen can learn the catch in both zones. The fisherman's problem now iswhether to purchase the technology and where to sell their catch. Theorem 2. There exists a Bayes-Nash equilibrium where 1. there is a threshold x(i|/) such that all fishermen with catch greater than this value purchase search (and switch markets when the zones are in opposite states) and 2. a reduction in *Pweakly reduces price dispersion between the markets. In the Appendix, this theorem is proven for the case where t > t*, since in practice there was no arbitrage before mobile phones were available (as shown later).8 As before, fishermen with the greatest catches are more likely to believe they are in a high density zone and thus may gain by switching. They are therefore more likely to purchase search.9 And although it entails an additional cost for potential arbitrageurs, introducing the search technology makes it possible for arbitrage to occur despite the fact that itwould not otherwise because when search costs are sufficiently small, the threshold catch for purchasing search is lower than the threshold for engaging in "blind" switching. Search allows fishermen to learn the state of both zones with certainty and thereby avoid unprofitable switching (transporta tion costs incurred when both zones turn out to be in the same state, and transportation costs plus lower revenue when the blind arbitrageur guesses incorrectly and switches from an L to an H market). Search is purchased up to the point where the expected gain from arbitrage (net of transportation costs) equals the cost of search. And thus as the cost of search declines more fisherman 8. When t < t*, i.e., there would be some switching even without the search technology, Theorem 2 continues to hold but only when search costs are below a threshold, ?*(t). If search costs are high relative to transportation costs, two cases can arise: (1) no fishermen purchase search, but those with the highest catches switch anyway (as in Theorem 1 or 2) fishermen with the highest catches switch without purchasing search and fishermen with catches in an intermediate range below this buy search and switch only when the zones are in opposite states. 9. In a repeated game where the search technology is a durable good like a mobile phone, fishermen purchase search when the discounted stream of expected gains from switching markets over the life of the technology exceeds the cost. Variation in the stream of expected gains can arise through heterogeneity in average catch (such as due to boat size or fishing gear) or arbitrage costs [due to the type of engine or boat (construction material or hull shape, for example) being used]. The basic conclusions of the model continue to hold. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 887 purchase it and engage in arbitrage when the markets are in opposite states, thereby reducing price dispersion. The model is easily extended to include waste (as observed in Table I). Waste arises because of saturation points in demand; while consumers purchase more fish on days when the price is low, there is a limit to how much they will purchase on any given day, especially since fish cannot be stored.10 Thus, if the maxi mum quantity demanded at each town is less than the total catch when a zone is in the H state, there will be waste in a market whenever the corresponding catchment zone is in state H and there is no arbitrage. Lower search costs reduce waste by facili tating arbitrage when the zones are in opposite states. It should be noted that while we have modeled it here as a problem of costly information, excess price dispersion or a lack of arbitrage may arise for other reasons, such as constraints on trade. For example, fishermen may collude to punish buyers who purchase from nonlocal fishermen, buyers may collude to punish fishermen who sell outside their local market, or there may be interlinked transactions, such as when a fisherman receives credit from a buyer and in exchange must always sell to them (as seen in Gine and Klonner [2002] and Platteua [1984]). In these cases, reduced search costs would not lead to more arbitrage unless it affected the ability to sustain such constraints. How ever, in the region of study, fishermen reported no such con straints on fish marketing during this period. II.B. Welfare Effects Beyond reducing price dispersion, increased arbitrage due to search will also result in a net welfare gain. Figure I shows the basic analytics of the welfare change under the assumption of perfectly inelastic supply (which we show approximates the Kerala case). The figure shows consumer and producer surplus when one zone is in an H state and the other is in an L state, with and without arbitrage. In the L zone, consumers gain A+B while producers lose A and gain C when X fish caught in theH zone are added to the market. These changes can be viewed as a net gain ofB+C and a transfer ofA from producers to consumers (because 10. Fish retailers inKerala report that saturation points affect their decision making; there is a limit to how much fish they are willing to buy because they know that only a certain number of customers are likely to come to their market on a given day, and there is a limit as to how much any customer will buy, even at arbitrarily low prices. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions Price Price | L-ZONE I H-ZONE ^ \h \p(Ql)-\ :\ j ? \ ' \ ! A B \! \ i c ; \.\_ . _ , \^^ P{Qh) -^_ L?J_^-? I_J-i^-?-QL QL+XQuantity Q^X Figure I g Changes inWelfare Associated with Arbitrage This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 889 the QL fish caught in that zone are now sold at a lower price than if there were no arbitrage). In theH zone, consumers lose D+E, while producers gain D and lose F, representing a net loss ofE+F and a transfer ofD from consumers to producers (since the QH-X nonarbitraged fish now sell for a higher price). The net change in total welfare is the difference in the two quasi-trapezoids, CB+C)-(?+F) or $%LL+XP(Q)dQ $%HH_XP(Q)dQ. Provided the demand curve has a negative slope everywhere between QL and QH, the net change is always positive because the two quasi trapezoids have the same base, while P{QL+X) is always greater than P(QH-X), by at least the transportation cost of themarginal switcher. The difference reflects the increase in welfare from moving X fish from where on the margin they were valued less (the high catch, low price market) to where they were valued more (the low catch, high price market). These gains can be substantial, especially when the no-arbitrage price difference is large.11 Further, the net gain will exceed total search and trans portation costs.12 Finally, while we used consumer surplus to measure welfare, Hicksian compensated demand curves can be substituted for the Marshallian curves in Figure I; since the former are always downward sloping, the same prediction of a net gain inwelfare holds for other measures ofwelfare. The size and direction of the net transfer from consumers to producers, D?A, as well as the net gain for each group, (C-A)+(D-F) forproducers and (A+B)-(D+E) for consumers, will depend on the shape of the demand curve (in particular, the price elasticities of demand at the initial quantities) and the amount of arbitrage. Thus, how the net welfare gain is shared between the two groups, and whether, in fact, one group gains while the other loses 11. For example, with a linear demand curve, P = a bQ, the percent increase inwelfare from arbitrage is given by Xb(QH - QL X)/(a(QH + QL) - 56(Q? + Q%)). If a = 10, h = .1,QL = 1, and QH = 9, the gain ranges from 12 percent when one fish is arbitraged to 27 percent when four fish are arbitraged (though we must subtract transportation costs). 12. Consider the case with zero search costs and perfect information; in equilibrium, the price difference between the markets is ilx, where x is the catch of the marginal fisherman who switches. Then the area of rectangle C above P(Qh~^0 (i.e., the top point of the quasi-trapezoid E+F) is (X/xh. Note that (XIx) is greater than the total number of fishermen who switch markets since all fishermen who switch will have catch at least as great as the marginal switcher. Thus, this area alone (and thus C-{E+F) alone) is greater than total transpor tation costs incurred (t times the number of fishermen who switch). A similar argument holds when search costs are added. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 890 QUARTERLY JOURNAL OF ECONOMICS in response to increased arbitrage, is a priori ambiguous.13 In gen eral, the gains for consumers will be smaller (or even negative) when demand is less price elastic. However, it is possible for both groups to gain, especially ifarbitrage also reduces waste. In analyzing the welfare effects of commodity price stabiliza tion via storage, Newbery and Stiglitz [1981] and Wright [2001] emphasize the direct benefits of reduced price risk, including possible supply responses. However, later we will argue that these issues are not relevant for the present case. Perhaps the most significant aspect of welfare omitted so far is the conse quence for consumers of reduced price variability. Consumers may prefer prices that vary day to day because they can engage in intertemporal substitution, waiting to consume only on days when prices are low.14 However, consumers also gain from less variable prices because they can have smoother consumption and because they do not need to incur costs to visit markets to find out ifprices are low since the price is stable and predictable. The net effect for consumers ofmore stable prices is therefore ambiguous. III. Data and Empirical Strategy The data for this paper come from surveys in Kerala's three northern districts, Kasaragod, Kannur, and Kozhikode. We con ducted a weekly survey of300 sardine fishing units15 throughout the region of study on Tuesdays of every week fromSeptember 3, 1996, toMay 29, 2001. We first chose fifteen of approximately thirty-five beach markets (which also serve as the ports or "landings" for the fishing units) throughout the districts, selected so that there was one market, on average, every fifteen kilometers. Within each landing, we made a census of all sardine fishing units and then randomly chose ten large (twenty-eight feet or above) and ten small units. Interviewed in the afternoon regarding that morning's 13. Synthesizing earlier work byWaugh [1944] and Oi [1961], Massell [1969] argued that consumers lose and producers gain when price is stabilized at its arithmetic mean if supply shocks drive price variability, and vice versa for de mand shocks. However, this result relies on the assumption of linear supply and demand curves. 14. Though if all consumers engaged in such substitution, there would be no price variation even without arbitrage. If everyone tried to consume on low price days, the increased demand would drive up the price, and vice versa on high price days. Demand shocks would perfectly offset supply shocks; in equilibrium the price today must equal the expected price tomorrow; though heterogeneity or limited substitution could generate equilibrium price variation. 15. A unit may contain more than one boat, as with ring seine units that use several boats and nets to encircle fish. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 891 market, each fishing unit was asked for the amount of fish caught, market of sale, quantity sold, sale price, time of sale, costs, and whether they used a mobile phone. Fishermen were also asked forwind and sea conditions (calm, mild, severe) and approximate fishing location (indicated on a map). Mobile phone service first became available inKerala on Jan uary 1, 1997. However, due to high investment costs and uncer tainty about demand, service was introduced gradually throughout the state, rather than all at once. For the three districts we consider, service became available first inKozhikode (Kozhikode city, effec tive January 29, 1997), followed by Kannur (Kannur city on July 6, 1998, and Thalassery on July 31, 1998) and then Kasaragod (Kasaragod city and Kanhangad onMay 21, 2000). Figure II shows the timing ofmobile phone service availability, where the area of study is divided into three regions based on service provision; each region also contains five markets from our survey. While mobile phone service was not explicitly planned to accommodate fishermen, the cities listed above are coastal, so with a service radius of about twenty-five kilometers for each mobile phone tower, service became available formuch of the range inwhich sardine fishing occurs (ten to thirty kilometers from the shore). Mobile phones spread widely among fishermen and buyers. Figure III provides data on adoption by fishermen in each of the three regions. The vertical lines represent the dates at which service became available in each region (weeks twenty-three, ninety-eight, and 198 in our sample). In each case, adoption increased rapidly before reaching a plateau after a fewmonths.16 The ultimate penetration level is high, ranging from 60-75 per cent across the regions.17 The phones were widely used for fish marketing; while almost all sales before mobile phones were conducted via beach auctions, fishermen with phones, often car rying lists with the numbers of dozens or even hundreds of po tential buyers, would typically call several buyers in different markets before deciding where to sell their catch, in essence conducting a virtual auction, and committing to a price while at 16. The flat part of the graph in region I was caused by long-term contracts among the first adopters. (Such contracts were not required during other periods.) 17. By contrast, adoption among the general population was less than 5 percent during this period. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 892 QUARTERLY JOURNAL OF ECONOMICS I ^f^ I I / \ Kasaraeodf\ ^ \ May 21,2000 / WJL/ ' '"S *~sREGIONHI I / M ^" **r / x U_> (Kasaragod) \\Y Kankangad I/, < May 21,2000*v \r'K>N , / >QKannurCity . N ^^-..-.^J^ nr/^inv ii Julv6,1998/ \ ^S-L\^WVV REGION II \ / \; V^_ \ ^^ J (Kannur) July31,199*v Vjk'}' ?^ I \ 0Kozhikode y> REGIQNI Jan.31,1997v \jr\:''^ ~"' (Kozhikode) \ y^ / Figure II Spread ofMobile Phone Coverage in Kasaragod, Kannur, and Kozhikode Districts sea.18 In general, phones were bought by the largest boats first, since they faced the largest potential gains to arbitrage and were also more likely to be able to afford the phones, which were initially expensive (as much as $100 US). Our empirical analysis compares how changes in the out comes of interest (price dispersion, waste, and welfare) corre spond to the staggered introduction ofmobile phones across the regions. We can break the sample into four time periods: period 0 18. Both fishermen and buyers report that it is extremely rare for a negoti ated deal at sea to be broken later, largely due to the need to establish a credible reputation. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions _REGION I_ 1 "" < Phones added I 1 K ? ^ o H f^-1-n?i-1-1-1-1-1-1-1-1-1-1-1-i-1-i-1-1-1-1-1-1-1-r-^ 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 19 SurveyWeek O _ REGION II_ ^ w l " '< Phonesaddedfe * J r^i-1-1-1-1-1-1-1-1-1-n-1-1-1-1-1-1-1-1-1-1-1-i-1-1-r-' 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 19 SurveyWeek g _REGION III_ ? g 1 ~ Phonesadded ?tq 0 j^-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-r? 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 19 SurveyWeek to Figure III Mobile Phone Adoption by Fishermen qq Data from the Kerala Fisherman Survey conducted by the author. ?g This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 894 QUARTERLY JOURNAL OF ECONOMICS (weeks one to twenty-two), when no region had mobile phones; period 1 (weeks twenty-three to ninety-seven), when only region I had mobile phones; period 2 (weeks ninety-eight to 197), when regions I and II had mobile phones; and period 3 (weeks 198 249), when all three regions had mobile phones. Letting Yrp represent the average value of the outcome of interest in region r in period p, we can examine the change in Y in region I between periods 0 and 1, i.e., before versus after the introduction ofmobile phones in the region, relative to the change over the same periods for regions II and III, i.e., (1) (F/,i - YIfi) - (Yn>1 - YIIfi) and (2) (Y7>1 - YIfi) - (YIIIA - YIIIfi). Similarly, for the addition ofmobile phone service to region II, we can compare (3) (Y7/,2 - YIhl) - {Yh2 - y/fl) and (4)(YIL2-YIhl)-{YIIL2-YIIL1). Finally, for region III, we can compare, (5) (?///,3 "~ YIU2) ~ V^/,3 "" YI2) and (6) (Y 111,3 ~ Yin^2) ? (YII3 ? YU2). To control for other factors that may influence market outcomes, we estimate, II 3 Yr,t = ? + E P,Regionr + ]? ppPeriodp r=I p = l II 3 + S I (3rpRegionr * Period^ + yZr,t + er>? r=Ip-l where Z is a set of control variables that may affect the extent of arbitrage, including wind and sea conditions and the price of fuel. This strategy eliminates fixed differences across the regions and This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 895 TABLE II Mobile Phone Introduction and Changes in Fish Marketing Behavior Period 1 Period 2 Period 3 Period 0 (region I (region II (region III (pre-phone) adds phones) adds phones) adds phones) Percent offishermen who fish in local catchment zone Region I 0.98 0.99 0.98 0.98 (0.003) (0.001) (0.001) (0.002) Region II 0.99 0.98 0.99 0.99 (0.002) (0.001) (0.01) (0.001) Region III 0.98 0.98 0.98 0.99 (0.002) (0.001) (0.001) (0.001) Percent offishermen who sell in local catchment zone Region I 1.00 0.66 0.63 0.62 (0.00) (0.005) (0.005) (0.006) Region II 1.00 1.00 0.64 0.58 (0.00) (0.00) (0.004) (0.006) Region III 1.00 1.00 1.00 0.70 (0.00) (0.00) (0.00) ' (0.005) Number offishing units Region I 83 85 85 89 Region II 69 74 75 75 Region III 53 55 54 56 Data fromtheKerala Fisherman Survey conductedby theauthor,using fishermen'sself-reportoffishing locationandmarket of sale. The catchmentzone foreach town is thearea ofsea definedby linesextending out to sea at themidpoint between a townand itsnearest neighbors to thenorthand south.Regions and periods are as defined in the text.Standard errors inparentheses. common trends or changes over time in factors that affect all three regions equally, such as changes in state fisheries policy or boat, engine, or storage technologies. The identifying assumption is that in the absence of the introduction ofmobile phone service, there would have been no differential changes in the outcomes across these regions. We discuss potential challenges to this as sumption in detail in Section IV. Tables II and III demonstrate the identification strategy. Table II shows that prior to the introduction of service (period 0), in all three regions fishermen both fished and sold their catch almost exclusively within their local catchment zone.19 However, once mobile phones are introduced in region I,while all fishermen 19. Catchment zones are denned as the area of sea closest to each fishing village (i.e., a line extending out to sea at the midpoint between a village and the nearest town to the north or south). This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 896 QUARTERLY JOURNAL OF ECONOMICS TABLE III Price Dispersion and Waste in Kerala Sardine Markets Period 1 Period 2 Period 3 Period 0 (regionI (regionII (regionIII (pre-phone) adds phones) adds phones) adds phones) Max-min spread (Rs/kg) Region I 7.60 1.86 1.321.22 (0.50) (0.22) (0.10) (0.44) Region II 8.197.30 1.791.57 (0.44) (0.29) (0.19) (0.16) Region III 8.247.27 7.602.56 (0.47) (0.27) (0.25) (0.34) Coefficient of variation (percent) Region I .68.14 .08.07 (0.07) (0.01) (0.01) (0.01) Region II .62.55 .12.08 (0.04) (0.04) (0.01) (0.01) Region III .69.57 .54.14 (0.09) (0.04) (0.03) (0.02) Waste (percent) Region I 0.08 0.00 0.00 0.00 (0.01) (0.00) (0.00) (0.00) Region II 0.05 0.04 0.00 0.00 (0.01) (0.01) (0.00) (0.00) Region III 0.070.06 0.060.00 (0.01) (0.01) (0.01) (0.00) Data fromtheKerala Fisherman Survey conductedby theauthor.Period and regionsare as denned in the text.The max-min spread is thedifferencebetween thehighest and lowest7:30-8:00 a.m. average price on a givenday among thefivemarketsmaking up each region,inyear 2001 Rs/kg.The coefficientofvariation is the standarddeviation ofthe 7:30-8:00 a.m. average price on a givenday across thefivemarkets within each regiondividedby themean 7:30-8:00 a.m. average price foreach region.Waste refersto thepercent of fishermenwho reportnot selling theircatch.Standard errors inparentheses. there continue to fish in their own catchment zone, about one third now sell their catch outside their local market. By contrast, all fishermen in regions II and III continue to sell in their local market. However, similar patterns of change in marketing are seen in these other regions once they receive mobile phone service in periods 2 and 3. Overall, the introduction ofmobile phones leads to the onset of a significant amount of arbitrage, with 30-40 percent offishermen on average selling outside their local market on any given day, from an initial situation of near autarky. Using the same strategy, Table III considers changes in This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 897 market outcomes. Since prices may vary within a market over the course of the morning, in order to construct a measure of price dispersion we need the prevailing price in each market at a particular point in time. Since in our small sample we do not have a sale at exactly, say, 7:45 a.m. in each market on every day, we instead take the average price for all sales occurring within a time interval; in particular, formost of our analysis we use the average 7:30-8:00 a.m. price, which represents the market clos ing price (though the results are robust to using alternative times). We assign price based on time of sale rather than time of exchange, i.e., prices for sales via beach auction are assigned to the time of auction, whereas sales via mobile phone are assigned to the time when the sale was arranged, not when the fish were delivered. Provided buyers offer the same price at a point in time in an auction as they would if a fisherman called at that time (even though the fish arrive later), price at time of sale is themost appropriate measure for examining price dispersion since it is the price a fisherman with a phone, who could choose among different markets, would be offered at that time. Finally, a price of zero was assigned when a catch was not sold. The top panel of Table III shows the max-min price spread, the difference between the highest and lowest 7:30-8:00 a.m. price across the five markets in each of the three regions defined earlier. Prior to the introduction ofmobile phones, there were large price differences across markets, with the average max?min spread within a region ranging from 7.6 to 8.2 Rs/kg. However, when phone service was introduced in region I in period 1, the mean spread declined to 1.86 Rs/kg, while declining only slightly in the other two regions. Similarly, when region II received phone service in period 2, the mean spread declined to 1.79 Rs/kg while increasing slightly in region III and declining in region I. Finally, the addition of phones to region III resulted in a similar, though slightly smaller, decline. The second panel shows similar patterns for a more commonly used measure of dispersion, the coefficient of variation (the standard deviation divided by the mean) of the 7:30-8:00 a.m. price across the five markets within each region. In the initial period, price dispersion is high, with the standard deviation within a region 62-69 percent of the mean price in that region. But in each region, once mobile phones are added this measure declines dramatically, to 14 percent or less. In line with the discussion in Section II.B, the fact that price dispersion is so This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 898 QUARTERLY JOURNAL OF ECONOMICS large before mobile phones suggests the net welfare gain from arbitrage is likely to be substantial. The third panel of the table considers the incidence ofwaste, measured as the percent of fishing units that do not sell their catch. In the initial period, the incidence ofwaste is high, with 5 to 8 percent offishermen unable to sell their catch on an average day. But once mobile phones were introduced to region I, the incidence ofwaste declined to zero, while declining only slightly in regions II and III. As earlier, similar changes are seen when mobile phones are introduced in regions II and III. The elimina tion of the significant amounts of waste initially found in the markets suggests not just greater potential welfare gains from arbitrage but also raises the possibility that consumers and pro ducers may both gain on net. To see these effects even more clearly, Figure IV presents price series for the average 7:30-8:00 a.m. price for one kilogram of sardines in each of the fifteen markets over the sample period, with markets grouped by the regions defined earlier based on when mobile phones were introduced. The graph shows that before any region had mobile phones, the degree of price disper sion across markets within a region on any given day is high, and there are many cases where the price is zero (i.e., waste). How ever, within a few weeks ofmobile phones being introduced in region I, there is a sharp and striking reduction in price disper sion. Prices across markets in the region rarely differ by more than a few rupees per kilogram on any day, compared to cases of as much as 10 Rs/kg prior to the introduction ofmobile phones. In addition, the prices in the various markets rise and fall together and the week-to-week variability within each market is much smaller, since catchment zone-specific quantity shocks are now spread across markets via arbitrage. Further, there are no cases ofwaste in this region after phones are introduced. By contrast, price behavior in regions II and III appears largely unchanged after phones are introduced in region I. However, after mobile phones are introduced in region II, prices again become much less dispersed across markets on any given day, less variable within markets over time, and waste is ultimately eliminated, whereas region III again remains unchanged. Finally, the same pattern holds once region III adds phones. This figure demonstrates clearly the extent to which the changes in price dispersion and waste were large and sudden, with timing that corresponds This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions _REGION I _ '5)^~ I III I * Phonesadded h-1-h?i-1 i-1-1-1-1-i-1-1-1-1-1-i-1-1-1-1-1-1-1-1-H 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 2 SurveyWeek ^ _ REGION II_ ^ Lj-!-,-!-!-,-,-,-,-,-1,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-,-J . 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 2 SurveyWeek ?g _REGION HI_ ^ 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 2 SurveyWeek ^ Figure IV t*j Prices and Mobile Phone Service in Kerala Data from the Kerala Fisherman Survey conducted by the author. The price series represent for average sardines. All prices in 2001 Rs. ?? This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 900 QUARTERLY JOURNAL OF ECONOMICS closely to the three distinct dates when mobile phone service was introduced in each particular region. IV. Results: Market Performance IV.A. Price Dispersion and Waste Before turning to the full regression specification allowing for separate treatment effects for each region, for ease of presenta tion we first pool the treatments and estimate, YrJt = a + (^Periodx + 02Period2 + 03Period3 + frRegionr + p?Regionn + ?APhoner?/J 4- yZrtt + er,, where Phoner p is a dummy variable equal to one in all periods p in which region r has mobile phone access. Table IV presents the results, which largely mirror those in Table III. The first column shows that themax-min spread across themarkets within a region is reduced by 5 Rs/kg on average when mobile phones are added to that region. These changes represent a substantial reduction, since themean spread prior to the introduction ofmobile phones was 7-8 Rs/kg. Column (2) shows the results for the coefficient of variation are again large, with the addition ofmobile phone service associated with a reduction of 38 percentage points in the standard deviation relative to themean. Finally, column (3) shows that waste is reduced by 4.8 percentage points when mobile phones are introduced. Thus, overall, the regression results confirm that the addition ofmobile phones was associated with a large and dramatic reduction in price dispersion and waste. Factors affecting the profitability of arbitrage generally have the expected sign for the various market outcomes, with worse wind/sea conditions20 and higher fuel prices, both of which increase transportation costs, generally associated with greater price dispersion. However, in all cases the effects Eiresmall, and we cannot reject the hypothesis that these factors have no effect on the outcomes. The lack of statistical significance may be due to the fact that nearly half the sample consists of period*zone obser vations where there was no mobile phone coverage and thus no arbitrage, so factors affecting transportation costs would not be expected to influence price dispersion. We therefore estimate regres sions where we interact these variables with the indicator for 20. Since wind and sea conditions are highly collinear, we add the two into a single index, varying from zero to six. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 901 TABLE IV Effects of Mobile Phone Service on Price Dispersion and Waste: Pooled Treatments (2)(3) (5)(6) (1) Coefficient Percent (4) Coefficient Percent Max?min of have Max-min of have spread variation waste spread variation waste Phone -5.0 -.38 -0.048 -5.3 -.41 -0.047 (0.27) (0.03) (0.004) (2.9) (0.32) (0.06) Region I -0.92 -.06 -0.007 -0.94 -.06 -0.006 (0.26) (0.03) (0.005) (0.26) (0.03) (0.005) Region II -0.46 -.04 -0.011 -0.46 -.04 -0.011 (0.21) (0.02) (0.004) (0.21) (0.02) (0.005) Period 1 -0.89 -.12 -0.017 -0.84 -.12 -0.016 (0.29) (0.04) (0.008) (0.29) (0.03) (0.008) Period 2 -1.1 -.17 -0.019 -1.0 -.16 -0.018 (0.32) (0.04) (0.008) (0.33) (0.04) (0.008) Period 3 -1.2 -.19 -0.022 -1.2 -.19 -0.021 (0.40) (0.04) (0.009) (0.40) (0.04) (0.009) Fuel cost 0.02.01 0.001 -0.13 -.02 0.003 (0.12) (0.01) (0.002) (0.19) (0.02) (0.005) Wind/sea index 0.086 .001 -0.002 -0.03 -.01 -0.003 (0.051) (0.004) (0.002) (0.06) (0.01) (0.003) Phone*fuel cost 0.25 .026 -0.003 (0.14) (0.014) (0.006) Phone*wind/sea 0.19 .021 0.003 index(0.08) (0.008) (0.005) Number of observations 747 747 74,700 747 747 74,700 Data fromtheKerala Fisherman Survey conductedby theauthor.The variable Phone isassigned a value ofone forall dates inwhich a regionhas mobile phone serviceavailable. All prices are in2001 Rs. Standard errors,clusteredat thevillage level forcolumns (3) and (6), inparentheses. whether the region had mobile phones. In columns (4) and (5), both interaction terms are statistically significant for themax-min price spread and the coefficient of variation, with the expected signs; higher fuel costs and worse wind/sea conditions increase price dis persion when there is arbitrage in a region. And, as expected, we cannot reject the hypothesis that these variables have no effect on dispersion when mobile phones are not available in a region. In column (6), the wind/sea and fuel interaction terms still have no effect on waste since there is no waste after mobile phones are introduced. As stated earlier, we can exploit the variation in the timing of introduction ofmobile phones across the three regions by estimating regressions with separate treatment effects. Table V presents the estimated effects ofmobile phones on themarket outcomes for each This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 902 QUARTERLY JOURNAL OF ECONOMICS TABLE V Estimated Effects of Mobile Phones on Market Outcomes: Separate Treatments Max-min Coefficient of spread variation Waste Estimated effects of adding phones to region I (a) Using region II as the control group ?4.8 ?.46 -0.064 (YZ)1 - y/(0) - (Y77>1 - Y77)0) = (Wpi (0.68) (0.07) (0.005) (b)Using region III as the control group -4.8 -.42 -0.060 (Y7>1 - Y7>0) - (Y777a - Y777,0) = ?RI P1 (0.68) (0.07) (0.005) Estimated effects of adding phones to region II (c)Using region I as the control group -5.8 -.39 -0.039 (Yn,2 ~ YIA) - (Y/;2 - Y7>1) = (Wp2 (0.43) (0.05) (0.003) ~~ $RII_P1 ~ $RI_P2 + Pi?/_P1 (d) Using region III as the control group -4.9 -.36 -0.038 (YII>2 - YIItl) - (Y///)2 - Y7//>1) = ?RII P2 (0.43) (0.05) (0.003) ~~ $RII_P1 Estimated effects of adding phones to region III (e) Using region I as the control group -4.9 -.38 ?0.055 (Y777;3 - Y777>2) - (Y7>3 - Y7)2) = fiRIJP2 (0.48) (0.05) (0.004) ? $RI_P3 (f)Using region II as the control group -4.7 -.35 -0.054 (Yin,3 ~ Ynit2) - (Y77>3 - Y77)2) = ?RII_P2 (0.48) (0.05) (0.004) ? $RII_P3 Data fromtheKerala Fisherman Survey conductedby theauthor.The table reportstheestimated effects ofmobile phones onmarket outcomes separately foreach of the three regionsusing the combinations of coefficientslisted in small type,based on thefullregressionresults in columns (1M3) inTable X. Standard errors,clusteredat thevillage level forcolumn (3), inparentheses.All prices in2001 Rs. of the three regions, which, inmost cases, are a combination of the coefficients from the full regressions (presented in the Table X). The results are broadly similar to those for the pooled regressions. Esti mators (1) and (2), the impact on region I of adding phones between periods 0 and 1, reveal that themax-min spread across markets was reduced by 4.8 Rs/kg when compared to either region II or III. For region II (estimators (3) and (4)), the effects are slightly larger, 4.9 and 5.8 Rs/kg, than for region I; using region I as a control group results in a higher estimate than using region III, but we cannot reject the hypothesis that the two effects are equal. Finally, the effects in region III are similar to those in region I. And as with the other two regions, we cannot reject the hypothesis that the esti mated effects are equal for the two comparison groups. Overall, the estimates show some variation in themagnitude of the effects across the regions, ranging from 4.7 to 5.8 Rs/kg for the max-min price spread, 35 to 46 percentage points for the coefficient ofvariation and 3.8 to 6.4 percentage points forwaste. However, for both the max This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 903 min spread and the coefficient of variation, we cannot reject the hypothesis that the effects are equal for all pairwise comparisons of region*control group; forwaste, the effects are statistically signifi cantly smaller for region II than for either regions I or III due to the fact that waste was lowest there prior to the introduction ofmobile phones. Overall, the results confirm that the introduction ofmobile phones was associated with a large and dramatic reduction in price dispersion and waste, with broadly similar effects across the regions. IV.B. The Identifying Assumption The identifying assumption for the empirical strategy is that, had it not been for the introduction of mobile phone service, there would have been no differential changes in the market outcomes across these regions over this period. We discuss three potential areas of concern. First, in attributing all the differential changes in market outcomes to the addition ofmobile phones, we are assuming that there were no pre-existing differential trends inmarket out comes across these regions and that no other factors that could also have influenced these outcomes changed differentially across the regions. Figure IV revealed that the changes inmarket outcomes were sharp and sudden and correspond closely to the distinct points of introduction ofmobile phone service in each region. And the fact that no other large changes in price dispersion are observed except around these three distinct points suggests that differential changes in other factors are unlikely to have caused any significant fraction of the changes in price behavior attributed tomobile phones, since it is very unlikely that these other factors would have differentially changed at the same three specific dates at which each region received mobile phone service, but not at any other time. The sharp and sudden changes also make it unlikely that differential trends across the regions explain much of the differential changes in out comes (common trends are controlled for).More formally, in regres sions for the market outcomes using only the observations before mobile phones were available in any region (period 0) and including a linear time trend, region indicators, and time*region interactions, both the trend and interaction terms are small and not statistically significantly different from zero (results not shown). The same holds for regressions using only regions II and III, with data fromperiods 0 and 1 (before either region had mobile phones).21 21. However, we cannot rule out differential trends arising only around the same time mobile phones were introduced in each region. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 904 QUARTERLY JOURNAL OF ECONOMICS A second concern is that the timing of service across the regions was nonrandom.22 According to the mobile phone provid ers, the order of placement of service was determined by the size of the potential market, i.e., the population of the main city in each region. While the effects of fixed factors that differ across regions like population size are controlled for in the regressions, and while we saw no evidence of differential trends across the regions, we may be concerned that the timing of introduction of service in a particular region was delayed or sped up in response to other factors that could also affect market outcomes. For ex ample, rapid economic growth could have caused firms to speed up the delivery* ofmobile phone service because of the potential increased demand and separately could also have improved fish market outcomes, such as by increasing overall demand and reducing waste. This would result in a close correspondence be tween the introduction ofmobile phones and changes inmarket outcomes, without the former having caused the latter. As with the first concern, from Figure IV alone we consider this possibility unlikely, since we do not see any differential trends, or any large changes in the price series at any points in time other than when phones were introduced, and it is unlikely that changes in these other factors happened to occur at these three specific points in time (but no other time). Further, since mobile phone service takes a long time to set up, ifthe timing of service was responding to changes in factors (like economic growth) that were already beginning to improve market outcomes, we would expect to ob serve changes in these outcomes before phones are introduced, whereas Figure IV (and regressions using month instead of pe riod indicators (not shown)) shows that outcomes improved only after phones were introduced.23 The third concern with the identification strategy is the possibility ofmigration of fishing or marketing activities in re sponse to the addition of mobile phones. For example, when phones are introduced in region I, some fishermen in region II may begin fishing and/or marketing in region I (though such migration might work against our results, for example, by 22. There is not a concern, however, regarding nonrandom placement since the initial plan ofmobile phone providers and the ultimate outcome was to cover the entire coast, not just select areas. 23. Though we have to assume that phone companies did not accurately forecast in advance differential changes in these other factors, there is no evidence that there were any specific periods of large, sharp differential changes in, say, economic growth in these regions over this period, much less predictable changes. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 905 increasing supply and therefore waste in region I). However, Table II reveals that both before and after mobile phones almost all fishermen fished within their own catchment zone, with no change surrounding the introduction ofmobile phones. Further, the table reveals that after phones are introduced in region I, all fishermen in regions II and III still sell in their local market; similarly, all fishermen in region III sell in their local market even after phones are introduced in region II. TV.C. Alternative Explanations of theResults A final concern iswhether the introduction ofmobile phones had effects other than purely providing price information to po tential arbitrageurs that could also influence market outcomes. While we would still identify the effects of adding mobile phones onmarket outcomes, we could not interpret the results as (solely) evidence of the effects of enhanced arbitrage resulting from greater access to information. We consider six possibilities. The first iswhether mobile phones affected entry and exit, such as in response to an increase in the profitability of fishing. Differential changes in the number of craft fishing could, in turn, affect the supply tomarkets and, thus, market outcomes (though in some cases this would work counter to our results; for example greater entry would be expected to increase the amount ofwaste). The bottom panel ofTable II provides data on the average number of fishing units per landing, from a census conducted each Septem ber by the author from 1996 to 2001. Over the five-year period of the study, there was a moderate amount of entry, with each landing adding, on average, three to six units, relative to the base of fifty-three to eighty-three. However, looking across the table, there is no correlation between changes in the number of units and the introduction ofmobile phones in a region: upon adding mobile phones, region I added the same number ofunits as region III but three fewer than region II; region II added one more than region I and two more than region II; and region III added two more than region II, but two fewer than region I. High capital investment or the specific knowledge required for fishing may ultimately limit entry; further, fishing is largely conducted by members of only a few specific subcastes. A related concern is whether mobile phones affected the quantity or variability of fishermen's catch. For example, fisher men could diversify fishing location and use mobile phones to inform each other of places with the best catch, which could This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 906 QUARTERLY JOURNAL OF ECONOMICS increase total catch and/or reduce supply variability within (and across) catchment zones and thus reduce price dispersion and variability.24 Alternatively, fishermen might either lengthen or shorten their fishing time in response to learning market prices while at sea, either staying out to catch more fish when they learn prices are high or coming in early when they learn that prices are low. Under such behavior, the variability of catch across and within markets would be reduced, even ifthere were no arbitrage. In the first column of Table VI, we show results from pooled treatment regressions like those above, where the dependent variable is the amount offish caught (using fisherman-level data). The coefficient on the variable indicating the region has phones is negative, but very small and not statistically significantly differ ent from zero, indicating that the introduction ofmobile phones is not associated with a net change in the average catch of fisher men. However, this could be the result of offsetting positive and negative supply responses (cutting back catch when price is low and increasing catch when price is high). Therefore, we construct the coefficient of variation of the estimated total catch in the five catchment zones within each region based on fishermen's reports of approximate fishing location. In column (2) ofTable VI, there is no evidence that the variability of catch declined in response to the introduction ofmobile phones. The reduction in price disper sion across markets is therefore not attributable to a reduction in catch dispersion across markets. A third concern is that ifmobile phones lead to increases in wealth in those areas with coverage, such as through improving the performance of other economic sectors, there could be shocks to the demand for sardines that would exactly correspond to the introduc tion ofmobile phone service in each region. It is possible, for exam ple, that holding supply variability constant, a change in wealth could shift demand in such a way that supply varies along a flatter part of the demand curve, reducing price dispersion or variability. Or by increasing aggregate demand, increases inwealth could lead to reductions in waste. While we do not have high frequency consumption data over this period to test this hypothesis, we did 24. Though in interviews, we found no evidence of such behavior. The gains to diversification increase with distance, but so does the time (and cost) required to reach one spot from another, so the fish may have moved away between when one fisherman calls and the other can arrive. In addition, it is difficult to pinpoint and communicate exact location while at sea. Finally, catch is to an extent rival, so those with a good catch have an incentive to lie, and catch is hard tomonitor, especially when fishermen sell in different markets. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions TABLE VI Testing Alternative Explanations s __________===== "Maximum dispersion" O Supply prices- - - g (1) (2) (3) (4) Quantity Coefficient Max-min Coefficient (kilogram) of variation spread of variation Phone -1.4 -.02 -4.5 -.34 (9.2) (0.04) (0.34) (0.04) Region I 33 -.08 -0.77 -.06 (8.0) (0.04) (0.31) (0.04) Region II 17 -.06 -0.48 -.03 (0.21) (0.03) (0.23) (0.02) Period 1 -15 -.002 -0.80 -.08 (14) (0.04) (0.29) (0.03) Period 2 -28 .05 -0.98 -.13 (18) (0.05) (0.31) (0.04) Period 3 -20 .03 -1.1 -.17 (20) (0.06) (0.38) (0.04) Number ofobservations 74,700 747 747 747 Data fromtheKerala Fisherman Survey conductedby theauthor.The variablePhone isassigned a value ofone forall date All pricesare in2001 Rs. Column (1)uses fisherman-levelobservationson catchforthedependentvariablewhile column (2)u acrossmarkets within a region.Columns (3) and (4), "Maximumdispersion"prices,estimatethepooled treatmentregression andmax-min spread observedduringa givenmarket day. Columns (5)-(7) use pricespredictedfrompre-phonemarket dem prices.Standard errors,clusteredat thevillage levelforcolumns (1) and (7), inparentheses. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 908 QUARTERLY JOURNAL OF ECONOMICS conduct annual household surveys from 1996 to 2001 at fifteen inland, nonfishing towns, each served by one of the beach markets in our survey.25 Within each town, we randomly chose twenty house holds and gathered detailed information on income, consumption, and expenditures. Estimating sardine demand curves with these data, we find that the income elasticity of demand is 0.12, with a standard error of 0.07. This elasticity is positive but small, suggest ing that unless thewealth effects ofmobile phones were very large, it is unlikely that, say, much of the reduction inwaste observed is due to increased demand. We can also test whether wealth changes the price elasticity of demand for sardines (which, in turn, might affect price dispersion) by dividing households into high and lowwealth groups (above vs. below the sample median). The estimated price elasticities are very similar for the two groups; -0.16 (standard error 0.09) forwealthier households and -0.23 (0.14) forpoorer households, and we cannot reject that they are equal. Changes in wealth would therefore be unlikely in themselves to have had a large effect in reducing price dispersion unless the changes inwealth were very large. A fourth alternate explanation of the results is that changes in the timing of transactions associated with sales via mobile phone may introduce a systematic bias in our comparisons of price disper sion over time. For example, suppose buyers start every day by offering an average price based on themean expected supply for that time of year, and then adjust up or down later in the day as the catches of arriving fishermen provide new information. In this case, since mobile phones give information about supply far in advance of the fish arriving at themarket, itmay be that phones simply allow the adjustment to take place earlier in the day, with net dispersion unchanged.26 To explore this issue, we estimate the pooled treat ment regressions using the maximum values of the coefficient of variation and max-min spread observed at any time (thirty-minute interval) during the day. Columns (3) and (4) ofTable VI show that the estimated effects are only slightly smaller than the original estimates (columns (1) and (2) ofTable IV) when this adjustment is 25. However, these towns were chosen because their proximity to roads made it feasible to survey them on a regular basis (for a weekly consumer price survey, discussed below), and they are therefore wealthier and have better infrastructure on average than other towns or villages in the region. 26. We note that, however, the measurement ofwaste does not suffer from the same timing issue because we measure any occurrence ofwaste in our sample throughout the day, not at a particular point in time. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 909 made; this is largely because price dispersion varies very little dur ing the market. A fifthconcern iswhether price dispersion was reduced simply because mobile phones enabled greater price collusion across mar kets, on the part of either fishermen or buyers, by directly facilitat ing communication and coordination.27 In interviews, fishermen, buyers, and NGOs in these regions all indicate that the markets have always been very competitive, with no evidence of collusion or price fixing either before or after mobile phones. This is attributed largely to the fact that there is a large number of small agents on both sides of themarket, making collusion difficult to sustain. And, of course, we can rule out that all of the reduction in price dispersion is due to greater price fixing across markets since then we would not expect to see fishermen selling outside their local markets (as ob served in Table II). However, unfortunately, the hypothesis that at least some collusive behaviors changed cannot be tested directly, though later we discuss a limited approach. Finally, sales via mobile phone may also have changed the contracting environment, for example, providing insurance for buyers against ending the day without purchasing any fish or for fishermen against not being able to sell their fish. For example, before mobile phones, some very risk-averse buyers may have paid a premium to ensure supply (especially on days when the first fishermen arriving indicated a low catch), or some risk averse fishermen may have accepted lower prices to ensure a sale. If the degree of risk aversion varied across markets, or if such "insurance pricing" pushes prices towards the extremes, it could affect price dispersion. Mobile phones might therefore reduce dispersion simply by reducing uncertainty by allowing buyers and sellers to call and learn about the catch early in the day, minimizing the need for such pricing behavior. As earlier, we can rule out the hypothesis that all of the changes in price dispersion are attributable to changes in insurance pricing since we would then not observe arbitrage as in Table II. And in extensive focus group and individual interviews, neither buyers nor fishermen report any such behavior. Unfortunately, however, it is not pos sible to test this hypothesis more formally. While we were unable to directly rule out the previous two 27. Mobile phones could also make collusion more difficult to sustain since more transactions are conducted in private over the phone rather than through auctions on the beach that are easily monitored by others. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 910 QUARTERLY JOURNAL OF ECONOMICS concerns, we can provide a rough "plausibility check" onwhether the changes inmarket outcomes would have been predicted based solely on the amount of arbitrage observed once phones were in place. In particular, we first estimate beach-level demand curves using only observations in each region before mobile phones were in place, relating themean 7:30-8:00 a.m. price to estimates of total quantity delivered to themarket.28 Then using data on catch and market of sale fromdates aftermobile phones are introduced, we estimate the quantity delivered to each market and predict the 7:30-8:00 a.m. prices that would prevail under the pre-phone demand curves. Fi nally, we use these results to generate predicted measures of price dispersion forpost-phone periods.29 Again, this approach is intended primarily to provide a check forwhether the changes in outcomes are consistent with the increased amount of arbitrage observed. However, it also indirectly provides some rudimentary bounds on the extent to which changes in other factors caused by mobile phones can explain the changes inmarket outcomes; ifprice collu sion or insurance pricing were significant factors in determining price dispersion, and these behaviors changed significantly when mobile phones were introduced, we would expect quantity to be a poor predictor of post-phone outcomes when predicted off of pre phone demand curves. Applying this approach, we find that there is a high correla tion between the predicted and actual max-min price spread, coefficient of variation, and waste in post-phone periods; regress ing the predicted measures on actual measures yields R2 of .83 or above for all three measures. And in post-phone dates, the pre dicted max-min price spread differs from the observed spread by more than 1 Rs/kg in only 6 percent of region*date cases,30 and we accurately predict that waste would fall to zero under the 28. For a more flexible approach, we actually estimate the weighted average price at 100 points for quantity using a kernel smoother with a bandwidth of 0.1 and a quartic kernel. 29. One concern with this approach is that demand may have changed over time. Another is that while we have representative samples of fishermen in each village, after mobile phones are introduced, the sample of fishermen who visit a market on a particular day is not necessarily a representative sample of all fishermen who visited that market. While we will observe fishermen from our high catch markets visiting non-sample markets, we will not observe fishermen from non sample markets visiting our low-catch sample markets. Thus, we will more accu rately estimate quantity when there is a high catch in the zone near a market than when there is a low catch. Thus, we are likely to predict higher levels of price dispersion than ifwe could directly measure the amount of fish arriving at the market. 30. As expected, formost such cases we overpredict dispersion. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 911 observed levels of arbitrage. Further, in columns (5)-(7) ofTable VI, we show regression results where the dependent variables are constructed using the predicted values formarket outcomes for post-phone dates and actual outcomes for pre-phone dates. The results are very similar to (though slightly smaller than) those using only observed price dispersion in Table IV; the max-min spread is reduced by 4.4 Rs/kg, the coefficient of variation is reduced by .31, and waste is reduced by 4.8 percentage points. Thus, on the basis of the amount of arbitrage observed alone, we predict similar reductions in price dispersion as those actually observed. Again, while this approach cannot rule out the possi bility of changes in other factors, it does show that the changes in market outcomes are highly consistent with, and well predicted solely by, the amount of arbitrage observed. Coupled with the evidence from interviews with fishermen and buyers suggesting neither collusion nor insurance pricing were significant factors before or after mobile phones, this suggests that to the extent these other factors are relevant, they can likely explain very little of the total change in outcomes observed.31 TV.D. The Law of One Price Provided there are no other barriers to arbitrage, sardine prices should not differ between any two markets by more than the cost of transportation between them. We can provide a direct, though approximate, test of the LOP. The primary variable cost influencing arbitrage is fuel, which is primarily affected by dis tance, wind and sea conditions, and the amount of fish being transported. On select days between May and September of 2003 we equipped two fishing boats with Global Positioning System devices to calculate distance traveled and gauges tomonitor fuel use. These trials provided variation in wind and sea conditions and catch sizes, which allows us to estimate fuel use per distance 31. However, this does not rule out the possibility that while phones enabled arbitrage, itwas not solely through providing price information. For example, the initial lack of arbitrage may have been due to collusion, such as buyers punishing fishermen who sold non-locally or fishermen punishing buyers purchasing from non-local fishermen, but otherwise not colluding over price. However, we consider this possibility unlikely. First, fishermen reported no such constraints on where they could sell, and buyers reported no constraints on who they could buy from, either before or after mobile phones. Second, it is unclear ifmobile phones would reduce the ability to sustain such collusion since, even though sales via phone are private, the fish must still be delivered to the buyer on the beach, so transactions involving non-locals can still be observed. Finally, it seems unlikely that such collusion would be sustained by a group but that that collusion would not also extend to pricing. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 912 QUARTERLY JOURNAL OF ECONOMICS TABLE VII Violations of the Law of One Price Period 1 Period 2 Period 3 Period 0 (regionI (regionII (regionIII (pre-phone) has phones) has phones) has phones) Overall Region I 0.54 0.03 0.040.03 Region II 0.57 0.55 0.060.05 Region III 0.60 0.58 0.580.08 With time + depreciation Region I 0.50 0.01 0.020.02 Region II 0.53 0.52 0.030.03 Region III 0.57 0.55 0.540.05 All markets combined Without time + depreciation 0.47 0.35 0.200.05 With time + depreciation 0.44 0.31 0.160.03 Data fromtheKerala Fisherman Survey conductedby the author. In the top twopanels, the figures representtheaverage percentofuniquemarket-pairs among the fivemarkets ina given regionforwhich the 7:30-8:00 a.m. average pricedifferencesdifferbymore than the estimated transportationcostsbetween the twomarkets on a given day. For thebottompanel, the figuresare fortheunique market pairs among all fifteenmarkets in the sample. traveled for various combinations of these factors. We then con struct an estimate of the cost of traveling between each pair of markets for each survey date, using data on the cost of fuel in the source market and the wind and sea conditions for a hypothetical boat carrying the average catch received on that day in the source catchment zone. Using these estimates, for example, a twenty eight-foot boat carrying 300 kilograms of sardines thirty kilome ters with no wind and calm sea conditions would consume an additional thirty liters of fuel. Thus, on a day with these condi tions when fuel costs 15 Rs/liter, the fuel cost of arbitrage over this distance is 450 Rs, so the price for sardines in two markets thirty kilometers apart should not differ by more than 1.5 Rs/kg. For all pairs ofmarkets, Table VII shows the percent ofmarket pair*day observations with 7:30-8:00 a.m. price differentials that exceed the estimated transportation cost between themarkets. The top two panels of the table consider only the ten unique pairs of the five markets within each of the three regions. In the initial period, 54-60 percent ofmarket-pair*day combinations had price differen tials that exceeded estimated travel costs, i.e., violations of the LOP. Including estimates of the value of time and depreciation associated This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 913 with arbitrage reduces estimated violations to 50-57 percent.32 Following the introduction ofmobile phone service, in each region the LOP was violated in only 3?8 percent of cases without account ing for time and depreciation and 1-5 percent when including these costs. The bottom panel considers the combinations of all fifteen markets rather than just testing within regions. Initially, the LOP is violated in 44-47 percent of cases, depending on whether time and depreciation are included. Once mobile phones are introduced in region I, this is reduced to 31-35 percent. Adding phones in region II reduces violations to 16-20 percent, and adding phones to region III reduces it to 3-5 percent. Thus, while violations can still be found, markets arrive at a very close approximation to the LOP. The overall change is striking; from an initial situation where towns operated in near autarky, with all fish caught and sold locally and excess price dispersion was the norm, the introduction ofmobile phones results in nearly perfect exploitation of profitable arbitrage opportunities.33 V. Welfare Effects The results so far suggest there are likely to be net welfare gains associated with the introduction ofmobile phones due to the more efficient allocation of fish, i.e, reallocating them to where they are more highly valued on the margin, including the elimi nation ofwaste. As shown earlier, how the gain is shared between producers and consumers and whether each group gains or loses on net is ambiguous. We take a reduced-form approach and provide simple estimates of the welfare changes. For fishermen, changes in profits are an appropriate measure of changes in welfare since fixed costs do not change and supply appears to be 32. The survey gathered data on when boats left and returned to their home port, so we can estimate time spent at sea, which we can value at the market wage. For depreciation, the typical outboard motor costs about 100,000 Rs and has a life span of 3,500 operating hours. Fishing craft, while expensive, have a long operational life (ten to fifteen years) and depreciate due to age more than use. Nets do not depreciate with arbitrage since they are not exposed to any additional wear while being transported on the boat. Thus we assume that both net and craft depreciation are negligible. Overall, then, depreciation from an additional hour of operation is valued at 29 Rs. 33. Though in principle, a fully-informed planner who could assign all fish ermen across markets at the end of the day might be able to achieve a better allocation with smaller price differences across markets and greater total welfare. (For example, there may be cases where a fisherman from market A visits a market close tomarket B and later in the day a fisherman from market B visits a market close to market A; if all catches were known, a planner could ensure fishermen engage in arbitrage with the markets nearest to them.) This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 914 QUARTERLY JOURNAL OF ECONOMICS relatively inelastic (Table VI). In addition, changes in price vari ability are unlikely to directly affect fishermen's welfare appre ciably since the variability is at the daily level and is therefore fairly easily smoothed over short intervals.34 The change in prof itswill arise through changes in price and quantity sold and the costs associated both with mobile phones and increased travel due to arbitrage. Table VIII shows the effects of the introduction ofmobile phones for the pooled treatments, and Table IX shows the estimated effects from the regressions with separate treat ments (full results are in the Table X). The first column of Table VIII shows that mobile phones, on average, increased quantity sold by twenty-three kilograms per day, resulting from the de cline inwaste. Table IX shows that the effects are similar across the regions, though slightly larger in region I due to the greater pre-phone amount of waste. By contrast, the average price re ceived decreased by .05 Rs/kg, though the overall effect is only marginally statistically significant. There is some variation in the change in price across the three regions, with some featuring price increases and some decreases, though the only statistically significant effects are a price increase of .16 Rs/kg in region I (relative to region III) and a decrease of .10 Rs/kg in region II (relative to region I). In column (3) we consider the change in the price among fish sold (i.e., excluding the pre-phone zeroes for unsold fish). Now, the change in average price received is nega tive and statistically significant (likely due in part to what is effectively an increase in supply of fish sold due to the reduction inwaste). The price declined by .44Rs/kg on average in the pooled treatment, or about 5 percent, with the largest declines in region III. Overall, revenue increased by 205 Rs, with the smallest effects in region III, while costs (including mobile phone use) increased, on average, by 72 Rs per day once mobile phones were introduced (though the effects are again smaller in region III). Column (5) shows the net effect of these changes is an increase in average profits of 133 Rs per day; this is a large gain, comprising about a 9 percent increase.35 It is also important to keep inmind 34. However, we note that reduced price variability increases profit variabil ity, since with spatial correlation in catches but no arbitrage, a low catch by a fisherman is usually met with a high price, and vice versa for a high catch. Increased arbitrage weakens the negative correlation between own catch and price, increasing profit variability. 35. Note, boats are often owned by several fishermen who split the profits, so the mean monthly profit per boat is greater than the average monthly income in this region. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions TABLEVIII ?j Effects of Mobile Phones on Producers and Consumers: Pooled (1)(2) (3) (4) (5) (6) (7) Quantity Price Price Revenue Costs Profits Profit sold(if >0) users Phone23 -.05 -.44 205 72 133 184 (8.4) (0.03) (0.03) (62) (5.6) (60) (90) RegionI36 .25 -.19 370 3.7 367 458 (6.6) (0.03) (0.03) (56) (4.9) (54) (77) Region II 22 .03 -.07 173 3.3 170 204 (5.2) (0.02) (0.02) (42) (3.0) (40) (57) Period 1-5.3 .48 .36 66 7.6 58 6361.22-.16 (10) (0.03) (0.03) (59) (4.2) (58) (94) Period2-17 .64 .51 34 2.3 32 -6.3 (14) (0.04) (0.03) (80) (3.7) (80) (122) Period3-7.8 1.0 .84 215 16 200 212 (16) (0.05) (0.04) (99) (6.0) (97) (145) Observations 74,700 74,700 73,335 74,700 74,700 74,700 41,012 ^^^=?=^=^==?=?=^^ ^ The data incolumns(l)-(8) are fromtheKerala Fisherman Surveyconductedby theauthor.Columns (9)and (10) are fromt Standard errors,clusteredat thevillage level,inparentheses.All prices in2001 Rs. 2 This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions TABLE IX 0) Rev sold Estimated effects of adding phones to region I ?? (a) Using region II as the control group 35 .11 -.46251100151-.43 g (Yl3l - y/>0) - (^77,1 - YIIt0) = 0*/ pi (7.6) (0.08) (0.07) (6 " Vrii pi g (b) Using region III as the control group 25 .16 -.41199 93106-.41 jj (YIA - YIt0) - (YIIL1 - YIIIf0) = ?RI P1 (7.7) (0.07) (0.06) (6 Estimated effects of adding phones to region II O (c) Using region I as the control group 22 -.10 -.40222 92130-.39 ? (^//,2 - y/fl) - (Y7p2 - ^7,1) = &RH-P2 ~ (4-8) (?-05) (0.04) (3 $RII_P1 ~ P/?/_P2 + $RZ_P1 ^ (d) Using region III as the control group 21 -.06 -.37 2479169-.38 (Y112 - Yni) - (^7772 " ^7771> = 0*7/P2 (4.9) (0.05) (0.05) (4 -' ft Prii_pi O Estimated effects of adding phones to region III ^ (e) Using region I as the control group 24 -.07 -.53 140129-.38 (Y///(3 - y///t2) - (77,3 - YI>2) = pRIP2 (5.4) (0.05) (0.04) (4 Pi?/_P3 (f)Using region II as the control group 21 -.05 -.50150 5199-.38 (YIIIf3 - YIIIt2) - (Y//>3 - YIIt2) = IW_P2 (5.5) (0.06) (0.05) (4 ~~ Pi?//_P3 The data incolumns (l)-(6) are fromtheKerala Fisherman Surveyconductedbytheauthor.Column (7) isfromtheannual h reportsthe estimated effectsofmobile phone use onmarket outcomesseparatelyforeach ofthe threeregionsusing the comb the fullregressionresults in columns (4)-(9) in theTable X. Standard errors,clusteredat thevillage level, inparentheses.Al This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 917 that rather than a one-time gain, the increase in profits repre sents a persistent change, due to the improved functioning of the market. Table IX reveals that the gains were positive and statis tically significant for all three regions, though smallest for region III, especially when region II is used as the control group. In columns (7) and (8) ofTable VIII, we examine the changes in profits separately for mobile phone users versus nonusers. Boats using mobile phones, on average, increased profits by 184 Rs per day, compared to 97 Rs for nonusers. Boats with mobile phones gained more (nearly twice as much) in part because they are, on average, larger boats and thus catch more fish and be cause they are more likely to be able to profitably exploit the small remaining arbitrage opportunities (as revealed inTable VII where some violations of the LOP still exist). However, phone users had a clear positive externality on nonusers, who will, for example, no longer have days with unsold fish because boats with phones will switch to other markets when the local catch is high. We can also use these results to examine the value ofmobile phones as an investment for fishermen. While costs varied over the course of the survey, we can approximate the cost of a handset at 5,000 Rs and the monthly costs of use at 500 Rs. The net increase of 184 Rs per day in profits for phone users would then more than cover the costs of the phone in less than two months (assuming twenty-four days offishing per month), making phones a worthwhile investment. In addition, there is no incentive to free ride; the additional 87 Rs per day ofprofit gained by users relative to nonusers would offset the costs of owning and operating the phone in just over three months. Thus, phones were a profitable investment for the fishermen who adopted them. Turning to consumers, we begin by examining the change in consumer retail price. As part of this study we conducted weekly market price surveys on the same days as the fishing unit survey at the same fifteen inland, nonfishing towns used for the household survey described earlier. For this survey, enumerators gathered data on prices for various food items, including sardines, at retail shops. The last column of Table VIII shows that, on average, the introduction ofmobile phones was associated with a .39 Rs/kg re duction in price, which is just under 4 percent relative to the base of about 11 Rs/kg; Table IX shows the effect is similar across the three regions. The magnitude of the effect is modest, though fish are typically consumed daily and thus constitute a moderate share of This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 918 QUARTERLY JOURNAL OF ECONOMICS household food expenditures; further, as with profits, the effects sire a persistent change rather than a one-period decline.36 The change in consumer welfare is, of course, more than just the change in price. While we lack the data to undertake a fullwelfare analysis for consumers, we provide a rough approximation.37 Using the annual household surveys, we first estimate the consumer de mand curve for sardines, with separate curves for pre- versus post mobile-phone introduction. Then from the weekly retail market price data, we construct CS as the area under the demand curve and above the price fine in each of themarkets for each day of the survey. We then run regressions like those above, using the generated CS for each market*week observation as the dependent variable. While the change in CS has well-known problems as a measure ofwelfare changes associated with price changes,38 a benefit to this reduced form approach is that it captures the consumer gains or losses from reduced price variability, such as smoother consumption or fewer opportunities to engage in intertemporal substitution. Such factors are reflected in the equilibrium demand curves, and thus any wel fare changes due to these other effects is accounted forby estimating CS offof separate demand curves before and after price variability is reduced.39 Using the pooled treatment regression,40 the last column of 36. However, the change in the average market clearing price, which iswhat is measured by the retail price survey, is not the same as the change in the average price paid by consumers; in general, the latter will typically be less than the former (and may even have the opposite sign). Unfortunately, we do not have high frequency consumption data at the household level, so we cannot estimate the change in the purchase price of fish. 37. Newbery and Stiglitz [1981] and Wright and Williams [1988] provide frameworks for analyzing the welfare effects of price stabilization, but, unfortu nately, these frameworks cannot be directly applied to the current case. 38. Using CS to compare welfare assumes a constant marginal utility of income or zero wealth effects of price changes (soMarshallian demand can be used in place ofHicksian compensated demand). However, Willig [1976] showed that the error in using the change in CS instead of equivalent or compensating variation formeasuring the welfare effects of price changes is small, especially when wealth elasticities in the demand for that good are small (which was shown to be the case here). Further, since we are examining a reduction in price vari ability, some errors will be offsetting; the errors caused by the wealth effects of comparing a high to an average price will be the opposite of the errors from comparing a low to an average price. Finally, Wright and Williams [1988] show that the change in CS is a good approximation to the change inwelfare associated with price stabilization provided the budget share of the good is small (<10 percent, as it is in the present case). 39. Though some consumers may be worse off even if consumers gain on average; for example, consumers with the greatest willingness to wait for low prices lose because very low prices no longer occur. 40. We do not estimate regressions with separate treatments because our small sample only allows us to estimate a single demand curve for all three regions. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 919 Table VIII shows that consumer surplus in sardines increased by .14 Rs per person per day, which is 6 percent of the average pre-phone CS for sardines (2.27 Rs per person per day). Thus, consumers gain as a result of the introduction ofmobile phones, and the gain is economically significant as a fraction of the initial CS in sardines. Though it should be noted that even multiplied by thirty (under the assumption that fish are consumed daily by most households), when compared to the average monthly expen diture per capita of 678 Rs (estimated from the household sur vey), the gain is very small (though if similar gains arise in the market for other commonly consumed goods, the overall con sumer gains relative to expenditure might be larger). VI. Conclusion We find that the addition ofmobile phones reduced price dis persion and waste and increased fishermen's profits and consumer welfare. These results demonstrate the importance of information for the functioning ofmarkets and the value of well-functioning markets; information makes markets work, and markets improve welfare. And it is again worth emphasizing that the results repre sent persistent rather then one-time gains since market functioning should be permanently enhanced by the availability of mobile phones. As mentioned earlier, information technologies are often considered a low priority for developing countries relative to needs in areas such as health and education. However, not only can such technologies increase earnings, but those increased earnings (or increased purchasing power, due to reduced consumer prices), in turn, can be expected to lead to improvements in health and educa tion. In addition, because mobile phones in Kerala are a private sector initiative rather than a development project, other than through perhaps raising interest rates for capital, they do not crowd out investments in other projects. Also unlike most development projects, the service is self-sustaining; mobile phone companies pro vide service because it is profitable to do so, and fishermen are willing to pay formobile phones because of the increased profits they receive. This point is also relevant for reconciling our results with anecdotal evidence that government or NGO projects setting up internet kiosks or other information services for farmers in other developing countries often do not meet similar success. The welfare gains to be had are directly tied to, and in fact are indicated by, the This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 920 QUARTERLY JOURNAL OF ECONOMICS profitability of both arbitrage and mobile phone provision, and the private sectormay be better suited to identifying such opportunities. In generalizing the results, it should be noted that the perish ability offish is an important reason why there was somuch waste and inefficiency before mobile phones and why better information has such a large impact onmarket performance and welfare. While there is evidence that even markets in nonperishable commodities, such as grains, are often not well integrated spatially, the biggest gains will likely be for other perishable commodities, such as milk, eggs, fruits, and vegetables, and possibly even day labor, where spot labor markets often only clear locally (within villages). And there .may be other factors relevant formarket performance that interact with the availability of information, such as transportation infra structure. For example, more recently inKerala, improvements in roads have lowered the cost of land transport, leading to more arbitrage bywholesalers on land (and less by fishermen) since trans port is now inmany cases cheaper by road than by sea. In other cases, poor quality roads may limit the ability of improvements in information to enhance market performance because arbitrage re mains prohibitively expensive. However, the widespread, voluntary adoption of ICTs formarketing by producers and traders observed in many developing countries suggests similar gains are likely to be found elsewhere. Finally, inmany countries, including India, there is a con cern over a perceived internal digital divide, with both ICT access and the resulting benefits available only to the wealthiest ormost educated, leaving all others behind. However, the evidence here suggests that the benefits of ICTs can be found among fishermen or farmers, not just software engineers or call-center workers. Further, while it was primarily the largest fishermen who adopted mobile phones in the present case, there were significant spillover gains for the smaller fishermen who did not use phones, due to the improved functioning ofmarkets. Thus, rather than simply excluding the poor or less educated, the "digital provide" appears to be shared more widely throughout society. Appendix: Proof of the Theorems Proof ofTheorem 1. Suppose there exists an equilibrium and that p* represents the equilibrium price difference between the twomarkets when one catchment zone is in state H and the other is in state L. Let tt(x) represent the updated probability that a zone is in state H for a fisherman with catch x. By switching This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions INFORMATION, MARKET PERFORMANCE, AND WELFARE 921 markets, the fisherman gains xp* with probability tt(x)/2 (the probability that their zone is in state H and the other is in state L) and loses xp* with probability (1 ? tt(x))/2 (the probability their zone is L and the other zone isH); with probability V2, the two zones are in the same state, and they receive the same price as if they did not switch.41 The equilibrium condition for switch ing is thus (tt(x) l/2)xp* > t. tt(x) is increasing in x since f{xi\di) satisfies the Monotone Likelihood Ratio Property, so the left-hand side of the previous equation is increasing in x,meaning that only fishermen with the highest values of x switch markets. Any equilibrium must therefore be based on a cutoff value of x, where all fishermen with catch greater than this value switch to the other market and all those below sell locally.42 It is then straightforward to construct the equilibrium bywalking down the distribution of catch from xmax to zero to identify the cutoff value, x(t). If t > (Tr(xmax) l/2)xmaxp*, transportation costs are too high (given the uncertainty over the state of both zones), and no one switches in equilibrium. For smaller values of t, some fish ermen will switch to the other market. Let p*(x) represent the level of price dispersion between the markets when the two zones are in opposite states and fishermen with catch x or above switch markets. p*(x) is weakly increasing in the cutoff value x since fewer fishermen are switching as x increases. The equilibrium cutoff x* for switching is defined implicitly by the equation (tt(x*) ? l/2)x*p*(x*) = t. Each term on the left-hand side is increasing in x, so x is an increasing function of twhenever there is an interior solution to this equation (0 < x* < xmax). So long as t is positive, this equation cannot be satisfied near x = 0; itwill never be worthwhile for a fisherman with a very small catch to switch markets. Thus, for t < (ir(xmax) - l/2)xmax(P(QI/) P(Qh))> there must be an interior solution x* to the equation above. And since p*(x) is increasing in x and the equilibrium cutoff x is increasing in t, price dispersion as an implicit function of t, p*(t), must also be increasing in r. Finally, consider again the equilibrium condition for switching, (tt(x*) - l/2)x*p*(x) = t. The first term on the left-hand side, (tt(x*) - 1/2), the 41. The equilibrium must be symmetric. So when both zones are in the same state, an equal amount offish flows from each zone to the other, leaving quantities and price equal in the two markets. 42. The equilibrium cannot involve a "gap" inwho switches (i.e., a fisherman with x < x(t)), since if it is worth it for that fisherman to switch, itwould also be worth it for all fishermen with catch above them to switch as well. This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 922 QUARTERLY JOURNAL OF ECONOMICS assessed likelihood that your zone is in an if-state and the other is in an L-state, reflects uncertainty regarding the state of both one's own zone and the other zone. Because this term will always be less than 1 (even if the state of one's own zone were known with certainty, nothing is known about the other zone), equilib rium price dispersion p*(x) will always exceed r/x*, the per-unit transportation costs for the marginal switcher. QED Proof ofTheorem 2. The proof follows that forTheorem 1 closely. Assuming that t > r* allows us to focus on the case where there is no switching in equilibrium ifthere isno search technology.We first show that fishermen with the largest catches gain themost from purchasing the search technology. By purchasing the search technology, the fish erman gains xp* - t in revenue with probability tt(x)/2 (the probability that their zone is in state H and the other is in state L). So the equilibrium condition for purchasing the technology is (tt(x)/2)(xp* t) > i|/.Since tt(x) is increasing inx, the left-hand side of the previous equation is increasing in x, meaning that only fishermen with the highest values of x purchase the search technology, and any price discovery equilibrium must be based on a cutoffvalue ofx.We again construct the equilibrium by walking down the distribution of catch from xmax to zero to identify the cutoff value, now x(i|j), where all fishermen with catch greater than the threshold buy the search tech nology and all those below do not. If i|i> Wxmax)/2)(xmax(P(QI/) - P{QH)) ? t), information is too costly and no one purchases the search technology in equilibrium, which reproduces the no-arbitrage case. For smaller values of ^F,some fishermen will purchase it.The equilibrium cutoffx* forpurchasing the search technology is defined implicitly by (tt(x*)/2)(xp*(x) ? t) = i|i.As earlier, each term on the left-hand side is increasing inx so x is an increasing function ofW whenever there is an interior solution to this equation (0 < x* < xmax). As stated, if * > (ir(*max)/2) X (xmax(P(QL) - P(QH)) ~ t), there is no interior solution. So long as r is positive, this equation cannot be satisfied near x = 0; itwill never be worthwhile for a fisherman with a very small catch to switch markets, so they will never pay to acquire price information. Thus, for \\f< (Tr(xmax)/2)(xmax (P(QL) - P(QH)) t), there must be an interior solution x* to the equation above. And since p*(x) is increasing in x and the equilibrium cutoff x is increasing in ^, price dispersion as an implicit function of the cost of search, p*(i|>), must also be increasing in H? (and, thus, reductions inty weakly reducep*(x)). Finally, note also that from the equilibrium condition for This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions TABLE X Effects of Mobile Phone Service on Outcomes and Welfare: Separat (1)(2) (3) (4) (5) Max-min Coefficient Percent Quantity Price Price spread of variation have waste sold ? Region I -.64-.01 .005 35 .03 (0.60) (0.07) (0.005) (6.8) (0.07) (0 Region II -.05-.07 -.02 32 -.01 -.1 (0.60) (0.07) (0.005) (6.9) (0.07) (0 Period 1 -.98-.12 -.016 -3.1 .39 (0.48) (0.05) (0.004) (5.6) (0.06) (0 Period 2 -.64.16 -.021 -14 .54 (0.46) (0.05) (0.004) (5.4) (0.05) (0 Period 3 -5.7-.55 -.076 18 .85 (0.51) (0.06) (0.004) (5.9) (0.06) (0 RegionI_periodl -4.8-.42 -.060 25 .16 -.4 (0.68) (0.07) (0.005) (7.7) (0.08) (0 RegionI_period2 -5.6-.44 -.062 24 .20 -.3 (0.66) (0.07) (0.006) (7.5) (0.07) (0 RegionI_period3 -.73-.07 -.006 -.36 .07 56411 (0.72) (0.08) (0.006) (8.1) (0.08) (0 RegionII_periodl .09.05 .004 -9.0 .04 (0.68) (0.07) (0.005) (7.8) (0.08) (0 RegionII_period2 -5.7-.34 -.036 12 -.01 -.3 (0.66) (0.07) (0.005) (7.6) (0.07) (0 RegionII_period3 -.97-.01 .018 -9.2 .04 47222 (0.72) (0.08) (0.006) (8.2) (0.09) (0 Observations 747747 74,700 74,700 74,700 73 Data fromtheKerala Fisherman Survey conductedby theauthor.Standard errors,clusteredat thevillage level, inpar This content downloaded from 147.251.189.14 on Fri, 03 Jul 2015 13:41:14 UTC All use subject to JSTOR Terms and Conditions 924 QUARTERLY JOURNAL OF ECONOMICS purchasing the phone, we can see that as "9goes to zero, the cutoff for purchase is driven to the x that would switch if both zones were known with certainty and the zones were in opposite states, and equilibrium price dispersion p* goes to t/x. 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