Association for Public Policy Analysis & Management

An important determinant of market efficiency is the extent to which all actors have access to the same information and can employ it productively. Substantial information frictions along supply chains of small firms can generate bottlenecks that slow dissemination of market information that owners use to manage their operations. High search costs is one type of information friction that especially affects rural business owners since they face high transaction costs to reach urban centers. Search costs include expenses incurred to acquire new market information from suppliers and buyers – such as changes in prices, product quality and availability, and financing options.

This research investigates whether lowering search costs decreases information frictions and improves small firms’ ability to source and sell goods in their local area. It leverages the scale-up of a digital phonebook application that effectively lowers the cost of accessing new business and customer networks. The mobile phone application aggregates and publishes contact information of rural and urban-based businesses. Importantly, the application is accessible on any type of feature phone, not just smart phones. Feature phone applications can serve as bridge technologies that connect relatively isolated rural users to information in better-connected urban areas. It can also lower the market power of urban traders as low-income buyers in rural areas expand their ability to search for goods and services at fair prices.

The research design employs a randomized experiment to learn how firms interact in their input and output markets. Participating small firms are split into a control and treatment group with two variations - 1) a phonebook listing targeting input markets, and 2) a phonebook listing targeting customers in output markets. The design allows for comparing the extent to which input or output networks constrain business performance in rural markets and whether lowering the cost of initial contact improves firm productivity. In the course of learning about the markets faced by small firms, these results will inform development practitioners and policymakers about what types of technology can move the needle on small firms’ ability to invest in their businesses and help tilt the market toward fairer outcomes.