Transaction costs, institutional arrangements and inequality outcomes: Potato marketing by small producers in rural Peru

We explore the distributional effects of lowering transaction costs to allow access to improved market opportunities for small farmers in the Peruvian Highlands. We find that when new marketing opportunities arise, those that have more land, are better educated and are well organized are able to deal with the complexities that the new contractual arrangements entail. Although this on average implies an increase in net income for small farmers, it also affects the distribution of earnings, generating a more polarized small farmer economy. To counteract this effect and reduce inequality in the opportunities of less endowed small farmers, complementary policies need to be put in place. © 2011 Elsevier Ltd.