Endogenous price fluctuations: Evidence from the chicken supply chain in Pakistan

Abstract

AbstractPersistent agricultural price fluctuations in developing countries have revived interest in the theory of endogenous price instability. We examine the underlying cause of price instability in Pakistan's broiler and chick markets. To this end, we utilize findings from our fieldwork and estimates from unobserved component‐models to formulate a theoretical model of endogenous price fluctuations in the chicken supply chain of Pakistan. Under standard assumptions, we derive hypotheses from our theoretical model that can be tested by using vector autoregressions and weekly data on broiler and chick (farm‐gate) prices in Pakistan. Our empirical estimates conform to the predictions of our theoretical model, and evidence of endogenous dynamics in observed prices is robust to alternative specifications and estimation methods. We use numerical simulations to illustrate that empirically grounded parameterizations of our theoretical model can emulate the salient features of broiler and chick price fluctuations in Pakistan. The accumulation of evidence from our descriptive, empirical, and numerical analysis builds a compelling case for the endogenous nature of price instability in Pakistan's chicken supply chain.