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Abstract

This paper analyzes effects of transaction costs on household responses, adding to direct effects via price-bands, indirect effects through reduced availability of productive resources and through changes in price formation. A micro economywide model with nonseparable household models is developed, in which transaction costs determine effective prices through an endogenous, household-specific price-band. Moreover, transaction costs influence household decisions by claiming productive resources, and by affecting endogenous prices at household or micro-economy level. Comparison of two stylized village model specifications indicates that indirect effects of transaction costs reduce household supply response, despite reducing the range of prices for which households operate within their price-band. Results show that transaction costs need to be identified in terms of commodities used for transactions, and in terms of tradability of these commodities, to account for indirect effects of transaction costs.

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