Spatial market integration of rice in Bangladesh in the presence of transaction cost

Modeling transaction costs is of particular importance when analyzing price integration in developing countries. Spatial price integration among five major Bangladesh rice markets are examined over the post-liberalization period that covered a long time span from January 1999 to December 2021, the longest period covered ever. We account for nonlinear price adjustments induced by transaction costs using a threshold cointegration approach to account for the impact of transaction costs in the price adjustment process. Our results show that large price deviations from long-run equilibrium are corrected within 2-3 months. Our results provide strong supporting evidence of the presence of threshold effects, which means that large transaction costs contribute to slow equilibrium price adjustments. Thus, our results provide important policy implications for Bangladesh rice markets, namely that polices aimed at reducing transaction costs are needed to engender greater pricing efficiency in Bangladesh rice markets.