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Abstract
Using survey data on traders and brokers in the Ethiopian foodgrain market,
this paper reveals that the brokerage institution is critical to market
performance in that it enables traders to circumvent the commitment problem
of long-distance trade with unknown partners. In the absence of grain
standardization, public information, and legal contract enforcement, brokers
act as inspectors and guarantors of each transaction. The paper analyzes the
sources of commitment failure, the role and functions of brokers and the
extent of brokerage use by brokers and argues that agency relations are not
based on ethnicity, depend on effective reputation rather than trust, and are
structured in an incentive-compatible manner.