Analysing the Impact of Price Shocks in Rural Economies: Do Household Responses Matter?

We analyse the impact of higher food prices on rural households in Tanzania focusing on the often neglected role of households' behavioural responses. We introduce a new framework which considers the production response jointly with substitution effects in consumption and takes into account households' market participation choices. Taking into account behavioural responses on consumption and production can significantly alter the sign and magnitude of the welfare impact in the long run.