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Economic theory emphasizes the importance of information for the efficiency of markets (Stigler, 1961; Brown and Goolsbee, 2002). Accordingly, reductions in information search costs are expected to enhance market effectiveness.

Recent advances in telecommunication technologies (TC) have made information transmission extremely cheap in developed societies. However, in the context of isolated communities in developing countries, TC are still far from being universally available. Therefore, interventions providing new access to TC in such societies provide an ideal opportunity to assess the impact of improved information accessibility on market performance.

Furthermore, if market effectiveness is improved with new TC, it becomes interesting to assess how this improved market performance influences household decisions such as the utilization of child labor and schooling. Accordingly, the purpose of this paper is to shed light on how the introduction of payphones among rural villages in Peru affected agricultural profitability and the utilization child labor.

Previous literature has studied the effects of TC using the introduction of cell phones as exogenous shocks. For example, Jensen (2007) analyzed the impact of cell phones introduction among fishermen in the Indian state of Kerala. The results show that the adoption of mobile phones was associated with a dramatic reduction in price dispersion, the complete elimination of waste, and near-perfect adherence to the law of one price. The mechanism behind such results is that fishermen started using the cell phones to gather information regarding markets with better prices (in short supply) whilein the sea. Therefore, they started to go directly towards these markets to sell their catch and, as a result, prices were equated across markets and market clearing resulted in eliminating the waste coming from unsold fish that was common before cell phone availability.

In the same vein, Aker (2010) analyses the effects of cell phone introduction in Niger. She focuses on grain markets and suggests that cell phones reduced price dispersion across markets by 6.4 percent and intra-annual price variation by 12 percent. Furthermore, the study finds greater impacts in market pairs that are farther away and for those with lower road quality. The study suggests that the main mechanism by which cell phones generate these outcomes is a reduction in search costs. Traders who operate in markets with cell phone coverage search over a greater number of markets and sell in more markets, thereby reducing price dispersion.

The FITEL Program

In 1992, the Peruvian government privatized all state-owned telecommunications companies and created a Telecommunications Regulatory Authority (OSIPTEL).3 In May 1993, OSIPTEL created the Fund for Investments in Telecommunications (FITEL) which began to collect a 1% levy charged on gross operating revenues of telecommunications companies in order to fund rural service expansion. In November 2006, FITEL was declared an individual public entity ascribed to the Ministry of Transports and Communications. The specific FITEL intervention studied here provided at least one public (satellite) payphone to each of the 6,509 targeted villages. To do so, FITEL divided the country into seven geographical regions (i.e. north border, north, middle north, middle east, south, middle south, and north tropical forest). The project was executed by granting a 20-year concession to private operators for public telephone services in each geographical region.

The selection of the operator for each region was based on an international auction for the lowest subsidy requested from FITEL for the installation, operation and maintenance of these public services. It is worth noting that all phones, regardless of which operator wins each region, had to be homogeneous with respect to the technology (i.e. satellite vsat phones).Targeted villages were selected by FITEL prior to the auctioning process following the three-phase procedure

Author: Diether Wolfgang Beuermann, Doctor of Philosophy,Department of Economics 2010 University of Maryland


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