THE DIGITAL PROVIDE: INFORMATION (TECHNOLOGY), MARKET PERFORMANCE, AND WELFARE IN THE SOUTH INDIAN FISHERIES SECTOR

THE QUARTERLY JOURNAL OF ECONOMICS THE DIGITAL PROVIDE: INFORMATION (TECHNOLOGY), MARKET PERFORMANCE, AND WELFARE IN THE SOUTH INDIAN FISHERIES SECTOR

When information is limited or costly, agents are unable to engage in optimal arbitrage. Excess price dispersion across markets can arise, and goods may not be allocated efficiently. In this setting, information technologies may improve market performance and increase welfare. Between nineteen ninety-seven and two thousand one, mobile phone service was introduced throughout Kerala, a state in India with a large fishing industry. Using microlevel survey data, we show that the adoption of mobile phones by fishermen and wholesalers was associated with a dramatic reduction in price dispersion, the complete elimination of waste, and near-perfect adherence to the Law of One Price. Both consumer and producer welfare increased.

One. INTRODUCTION

How do improvements in information impact market performance and welfare? Economists have long emphasized that information is critical for the efficient functioning of markets. For example, two of the most well-known results in economics, the First Fundamental Theorem of Welfare Economics (i.e., competitive equilibria are Pareto efficient) and the "Law of One Price" (LOP) (i.e., the price of a good should not differ between any two markets by more than the transport cost between them) rely heavily on the assumption that agents have the necessary price information to engage in optimal trade or arbitrage. These results reflect some of the most fundamental functioning of and advantages to a market economy; when goods are more highly valued on the margin in one market than another, a price differential arises and induces profit-seeking suppliers or traders to reallocate goods towards that market, reducing the price differential and increasing total welfare in the process. In reality, however, the information available to agents is often costly or incomplete, as emphasized by Stigler. In such cases, there is no reason to expect excess price differences to be dissipated or the allocation of goods across markets to be efficient. Yet despite the fact that information is both central to economic theory yet so limited in reality, there are few empirical studies assessing the effects of improvements in information. Thus, questions such as how much market performance can be enhanced by improving access to information, how much society gains from such improvements, and how those gains are shared between producers and consumers remain largely unanswered. In this paper, we examine these questions by exploiting the introduction of mobile phones in the Indian state of Kerala as a natural experiment of improved market information.

Beyond its prominent place in economic theory, the effect of information on market performance and welfare is also relevant to the debate over the potential value of information and communication technologies (ICTs) for economic development. Many critics argue that investments in ICTs should not be a priority for low-income countries, given more basic needs in areas such as nutrition, health, and education. However, this argument overlooks the fact that the functioning of output markets plays a central role in determining the incomes of the significant fraction of households engaged in agriculture, forestry, or fisheries production in low-income countries; for most of the world's poorest, living standards are determined largely by how much they get for their output. Additionally, the functioning of these markets determines the prices and availability of food, fuel, and other important consumer goods. However, in most developing countries, markets are dispersed, and communications infrastructure is poor. Producers and traders often have only limited information, perhaps knowing only the price in a handful of nearby villages or the nearest town, so the potential for inefficiency in the allocation of goods across markets is great. By improving access to information, ICTs may help poorly functioning markets work better and thereby increase incomes and/or lower consumer prices. In fact, it has become increasingly common to find farmers, fishermen, and other producers throughout the developing world using mobile phones, text messaging, pagers, and the internet for marketing output. However, while there is some macrolevel evidence that ICTs promote economic growth, the microlevel evidence has been purely anecdotal. Thus, the case of mobile phones in Kerala will also allow us to examine whether ICTs can play a role in promoting welfare in developing countries; while much has been written about how the uneven spread of ICTs has created a "digital divide" between rich and poor countries, considerably less is known about the benefits such technologies can provide the latter.

Fishing is an important industry in Kerala. For consumers, fish is a dietary staple; over seventy percent of adults eat fish at least once a day, making it the largest source of many important nutrients, such as protein. Further, over one million people are directly employed in the fisheries sector. However, a significant limitation to fish marketing is that while at sea, fishermen are unable to observe prices at any of the numerous markets spread out along the coast. Further, fishermen can typically visit only one market per day because of high transportation costs and the limited duration of the market. As a result, fishermen sell their catch almost exclusively in their local market. In addition, there is almost no storage (due to costs), and little arbitrage on land due to poor road quality and high transportation costs; ultimately, the quantity supplied to a particular market is determined almost entirely by the amount of fish caught near that market. Table I provides suggestive evidence of the resulting inefficiency. The table presents data for fifteen beach markets in northern Kerala, listed in north-south geographical alignment, on average fifteen kilometers apart. The first column provides the prevailing "beach price" (price paid to fishermen by wholesalers or retailers) for a kilogram of sardines on Tuesday, January fourteen, nineteen ninety-seven, at seven forty-five A.M., just before

Three. During the period of study, most beach markets were open only from five zero zero to eight zero zero A.M.

the effective market closing. There is a great deal of price variation, with some markets having an effective price of zero (fishermen arrive to find all buyers have departed) while others range from four point zero to as much as nine point nine rupees per kilogram (Rs/kg; one U.S. dollar equals thirty-six Rs). Note in particular that Badagara has a price of zero while Chombala and Quilandi, both within fifteen kilometers, have prices of nine point nine and nine point eight Rs/kg, respectively. Since an average boat on this day was carrying three hundred eighty-one kilograms of fish and the fuel cost of traveling fifteen kilometers was about two hundred five rupees, a boat arriving at Badagara was forgoing as much as three thousand four hundred rupees in profit. Columns two and three show this from another perspective, with data on the number of "excess buyers" (wholesalers/retailers who report having bought no fish because of high price or inadequate supply) and "excess sellers" (fishermen who arrive at a market and find no buyers and therefore dump their catch in the sea). The inefficiency is clear; while at Badagara there are eleven fishermen dumping their catch unsold, there are twenty-seven buyers within fifteen kilometers who are about to leave without purchasing any fish. Provided there are no other barriers to arbitrage, if fishermen had price information for all locations, the market should achieve an outcome where price dispersion is reduced, fish are allocated across markets more efficiently, waste is reduced or eliminated, and total welfare is increased (though how those gains will be shared between consumers and producers is ambiguous).

Beginning in nineteen ninety-seven, mobile phone service was gradually introduced throughout Kerala. Since most of the largest cities are coastal, many base towers were placed close enough to the shore that service was available twenty to twenty-five kilometers out to sea, the distance within which most fishing is done. By two thousand one, over sixty percent of fishing boats and most wholesale and retail traders were using mobile phones to coordinate sales. Thus, the case of Kerala provides an ideal setting for exploring the effects of information on market performance and welfare. Using microlevel survey data spanning this period, we find that price dispersion was dramatically reduced with the introduction of mobile phones; the mean coefficient of variation of price across markets (the standard deviation divided by the mean) declined from sixty to seventy to fifteen percent or less. In addition, there were also almost no violations of the Law of One Price once mobile phones were in place, compared to fifty to sixty percent of market pairs before. Further, waste, averaging five to eight percent of daily catch before mobile phones, was completely eliminated. Overall, the fisheries sector was transformed from a collection of essentially autarkic fishing markets to a state of nearly perfect spatial arbitrage. In addition, fishermen's profits increased on average by eight percent while the consumer price declined by four percent and consumer surplus in sardine consumption increased by six percent (though relative to average household expenditure, the latter effect is extremely small).

The remainder of this paper proceeds as follows: Section two discusses a simple model that generates predictions for the effects of mobile phones on market performance. Section three discusses the data and empirical strategy. Section four examines the effects of mobile phones on price dispersion, waste, and adherence to the LOP. Section five provides estimates of the welfare effects, and Section six concludes.