If smallholder farmers have access to the world market: The case of tobacco marketing in Malawi

We measure the impact of a reduction in transaction costs on crop area and production of smallholder tobacco growers in Malawi. For identification, we exploit the introduction of an additional tobacco auction floor. Estimations are based on annual data by extension planning area. A 10 per cent reduction in distance to auction floor is shown to increase crop area and production around 4 and 10 per cent, respectively. Supply response weakens beyond a distance to auction floor of 60 km and runs along the intensive margin: existing tobacco growers improve productivity of cultivation. Impacts are robust for non-random placement of auction floors and several other threats. The results point to potentially large welfare benefits for smallholders if marketing infrastructure is improved and if more auction floors are introduced.