Transaction risks and trust: A tale of two regions Sesame markets in Ethiopia

Markets play an important role in Africa. Studies of the actual performance of markets in Africa have found that institutional arrangements and transaction costs shape patterns of trade and partly determine the extent to which allocative efficiency is achieved. Yet we know little about how markets operate in practice. The problems African market institutions attempt to solve are the usual ones – commitment failure, asymmetric information, and transaction risks and costs – but the solutions are often are new. The paper develops a framework to identify how transaction risks lead to transaction costs and it builds on literature on trust and risk to identify how these concepts are related and can be identified in trader relationships in Ethiopia. The paper uses a database of farmers, intermediate traders and wholesalers in two sesame producing regions of Ethiopia. The results give an insight into which risks buyers and sellers face, how they lead to transaction costs and what mechanisms are employed by buyers and sellers to reduce these risks and costs. An interesting result is that it seems that geography leads to different production circumstances, risk, specialisation and therefore different trust relations between farmers and traders, leading to different transaction costs. 1.