Abstract
It is generally hypothesized in the innovation systems literature that institutions can create production incentives for farmers. This paper examines whether the introduction in 1984 of the Producer Price Review Committee (PPRC) in Ghana's cocoa sector has improved the transmission of world prices to farmers. We test how fast and to what extent world prices have been transmitted, and also address the stability of the prices received by cocoa farmers. For the period 1960–2011, the results were as follows: (1) the production of cocoa beans depended positively on the prices farmers received and negatively on price variance; (2) the establishment of the PPRC provided higher prices for farmers; and (3) the PPRC's use of the flexible freight on board (FOB) price-setting rule resulted in a better price transmission than the employed cost-plus-margin approach. However, under the FOB price-setting rule, producer price variance rose sharply. We conclude that, although FOB pricing mechanisms are often recommended for markets where prices are institutionally determined, stabilization policies should be factored in to protect farmers against international price fluctuations.
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