Assessment of Magnitudes of Transaction Costs and Their Effect on Smallholder Farmer Profitability in Kiambu-nairobi Leafy Vegetable Supply Chains

Abstract

Increasing urbanization in sub-Saharan Africa has resulted in a high value supply chain that has attracted rural vegetable farmers to participate in it. In Nairobi, existence of transaction costs along this chain has led to some leafy vegetable farmers being locked out from direct urban market participation. Consequently, they have chosen other market arrangements to ensure they are profitable. Using data collected from a sample of 111 farmers in Lari and Juja sub-counties, this study aimed to assess the effect of varying magnitudes of transaction cost on farmer profitability. The Heckman two-stage selection model was used to observe the effect of transaction costs on choice of market arrangement and farmer profitability. The results showed a significant negative relationship between time spent gathering information and direct participation in the urban market. However, time spent monitoring transactions and direct costs incurred negotiating with other actors had a significant positive relationship with direct participation in the urban market. Only transaction costs incurred during searching for information on market prices and nature of demand had a significant positive relationship with profitability. Improving access to market and price information by utilizing use of mobile or text message services would reduce the time spent thereby minimizing transaction costs incurred searching for market information. Further, policies that will facilitate establishment of institutions to facilitate beneficial negotiation and monitoring of transactions among actors will improve farmer participation in profitable urban markets.