The impact of maritime logistics subsidy on food prices: Evidence from Indonesia

Economic theory states that lower production costs associated with logistics cost reduction may decrease the market price. However, the effect partly depends on the mechanism. To test this conjecture, we investigate the causal effect of the maritime logistics subsidy on food prices in Indonesia. The subsidy has a unique setting of a trip-based freight subsidy: applied for specific food commodities and pre-determined shipping routes. Using the food prices data at the district level for 2015-2019 and the difference-in-differences approach, we find that the policy causes an average 3.2% decrease in food prices which gradually dissipates after one-year implementation. The effect is particularly pronounced in the western cities and specific food items. Our results can be partly attributed to the higher quality of intermodal transport infrastructure in the western regions, disparities in consumption patterns of commodities across regions, and the declining trend in average subsidy sizes per city. Our findings indicate that while the policy effectively alleviates the high-cost logistics burden, it does not sustainably enhance consumer price affordability. & COPY; 2023 Economic Society of Australia, Queensland. Published by Elsevier B.V. All rights reserved.