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Abstract

Based on the model by de Janvry, Fafchamps, and Sadoulet (1991), this study gives a two-step interpretation to response of the shadow or internal prices in a peasant household model with missing markets for both food and labor. In the first step, changes in exogenous variables have initial effects on the internal prices of food and labor in their respective “internal markets". In the second step, these effects are combined through interactions between the internal markets that are caused by cross-price effects between food and labor. Response of the internal prices under the two missing markets can be thought of as resulting from these interactions. This interpretation, as well as the sensitivity analysis based on it, reveals not only how the marked “internal instability" (or sharp fluctuation of the perceived scarcity) of food and labor arises but also which assumptions are crucial to produce it in the simulation analysis of de Janvry et al.

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