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Abstract

In West and Central Africa, vertical coordination is used by governments to control both input and output markets. This article assesses the potential economic effects of different institutional structures for parastatals using a structural model of smallholder cotton farms in Burkina Faso. A structural system is developed to measure the potential economic outcomes of three market alternatives in terms of a parastatal company (state-owned cotton company) exercising market power. Results demonstrate that, when a parastatal is allowed to exercise market power, it is incentivized to extract rents from the farmers maximizing the parastatal’s economic surplus. The primary beneficiaries of the privatization of the cotton sector are smallholder farmers, a result of the higher prices received in output markets. The parastatal extracts more from the output market than from the input market. With partial privatization, farmers are better off either in output or input markets.

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