We study transportation infrastructure and food markets in Nepal over the period
2002 to 2010, combining monthly price data from 37 local and regional markets and 7 Indian
border markets. We use a series of autoregressive models to study price determination, spatial
and temporal price transmission, and price variance. We account for district-level agricultural
production, correcting for bi-directional causality between output and prices using ground station
rainfall data. In addition, to test hypotheses regarding the importance of transportation
infrastructure we incorporate information on road and bridge density and fuel costs. For both rice
and wheat, we find strong evidence of local price intertemporal carryover and very weak
evidence of price transmission from regional, central and border markets to local markets,
suggesting very low degrees of market integration. Fuel costs are positively correlated with food
prices, and road and bridge density are negatively correlated with prices. We find evidence of
asymmetric effects: positive price shocks are correlated with higher subsequent price volatility
compared with negative price shocks of similar magnitude. Roads and bridges are important for
moderating price levels and price volatility in Nepal’s rice and wheat markets, explaining
roughly half of the spatial and temporal variation in price mark-ups between regional and local
markets.