BREAD Working Paper No. 609, July 2022

Does the Invisible Hand Efficiently Guide Entry and Exit?

Abhijit Banerjee, Greg Fischer, Dean Karlan, Matt Lowe, and Benjamin N. Roth


What accounts for the ubiquity of small vendors operating side-by-side in the urban centers of developing countries? Why don’t competitive forces drive some vendors out of the market? We ran an experiment in Kolkata vegetable markets in which we induced (via subsidizing) some vendors to sell additional produce. The vendors earned higher profits, even when excluding the value of the subsidy. Nevertheless, after the subsidies ended vendors largely stopped selling the additional produce. Our results are consistent with collusion and inertial business practices suppressing competition and efficient market exit.

JEL Codes: O12, O13 O17

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