access to rail transport if these markets are less than 20 km away from the nearest railway station.<sup>18</sup> Of course, 20 km is an arbitrary cut-off: we have verified the robustness of the estimation results by taking different cut-off distances (see _Robustness of estimation results_ ).

# IV.  ESTIMATIONS AND DISCUSSION

# _Other Empirical Issues_

In running the estimations, we have assumed that the impact of railway services is geographically restricted. Transport costs increase more or less proportionally with transport distance (and are, in this respect, different from search costs). As a result, the impact of availability of transport services is spatially restricted: transport costs are high and become prohibitive for markets that are a long distance away. As transport costs translate into higher prices of traded goods, there is a clear trade-off between “import” and local supply: local production or the use of close local substitutes could be cheaper alternatives than “import” from far away locations, especially if there is no advantage from specialization and if the agricultural product could be produced anywhere. Therefore, we assume that (potential) domestic trade only takes place between markets that are located a limited distance away from each other.

How far this distance is needs to be investigated empirically. Aggregate data on freight by rail indicate that the average distance of freight by rail in case of local freight is 80–115 km and in case of export or import freight, 180–220 km (calculations based on aggregate CEAR data). For domestic passengers, the average distance travelled varies from 40 to 80 km. Survey data on domestic trade and domestic traders, generally using (pickup) trucks as mode of transport, indicate that average distance between location of purchase and sale location of maize transactions is around 55 km with a maximum of 200 km (Fafchamps et al. 2005).

The distance over which crops are traded is likely to be influenced by perishability and storability of crops, whether the crop is a high- or low-value crop, the geographical spread of production and consumption, and how large expected gains from trade are. Since high-value crops have relatively lower transport costs, these crops are likely to be traded over longer distances. Next, trade in perishable crops is, by nature, spatially restricted: these crops simply degenerate if transported over long distances and thereby become unsellable (we ignore the possibility of cooled transport which is typically not feasible for a SSA farmer-trader.) Conversely, storable crops are more suitable to be traded over longer distances. Trade over longer distances may arise if production areas are more remote from consumption locations. Finally, the larger the gains the larger the distance over which crops are traded. These expected gains from trade depend on the difference in prices in each location, which in turn depends on differences in the supply and demand balance across locations.<sup>19</sup> A shortfall of local production relative to local demand will potentially give rise to high prices and is typical for urban areas. Seasonality in production will also lead to seasonality in prices, which will be more pronounced if demand is higher. Hence, differences in seasonality of prices across locations will affect expected gains from trade.

Moreover, we have also assumed that the period without railway services between the market pairs connected by rail is restricted. With the disruption of the railway bridge at Rivirivi, Balaka, a period started without railway services for markets along the railway line. The start of this period is 100% accurate. However, it is not clear when this period ended. From personal communication with CEAR staff we know that the railway bridge at Rivirivi was repaired and rail transport operations were

> 18. Practically this implies we have ten markets connected by rail (and thereby 45 intervention market pairs). These markets are: Bangula, Lilongwe, Limbe, Liwonde, Lizulu, Luchenza, Lunzu, Mchinji, Ntaja, and Salima (see also figure 1; see appendix 8 for a list with markets, distance-to-station, and latitude-longitude coordinates).

> 19. Availability of information on prices in several markets is obviously a key determinant of trade flows. Several studies highlight the importance of search costs and the availability of price information.

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