Optimal strategies for a three-level contract-farming supply chain with subsidy

• Published in: International journal of production economics Vol. 216; pp. 274 - 286
• Main Authors: Peng, Hongjun, Pang, Tao
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.10.2019
• Subjects: Agricultural subsidy policy; Contract-farming supply chain; Risk-averse; Yield uncertainty; Contract-farming supply chain; Yield uncertainty; Risk-averse; Agricultural subsidy policy
• ISSN: 0925-5273; 1873-7579
• DOI: 10.1016/j.ijpe.2019.06.011

We consider a three-level contract-farming supply chain with a risk-averse farmer, a risk-neutral supplier and a risk-neutral distributor, in which the farmer faces a yield uncertainty and the government offers agricultural subsidy to the farmer. The CVaR criterion is used to describe the risk-averse behavior of the farmer. We derive the optimal strategies of the supply chain and perform some sensitivity analysis to investigate the effects of the government subsidy and other factors. The results indicate that, as the subsidy increases, the farmer's total target production increases. Further analysis shows that the total production increase is mainly from the increased farm size, and the farmer's endeavor actually decreases. In addition, the results indicate that the profits of the supplier and the distributor both increase with respect to the subsidy. However, the impact of the subsidy on the farmer's profit depends on the farmer's degree of risk-averse. In particular, the impact of the subsidy to the farmer's profit tends to be positive for farmers with high degree of risk-averse, and the impact tends to be negative for those with low degree of risk-averse. The sensitivity analysis is also performed for the level of yield uncertainty in term of the standard deviation. •Consider a contract-farming supply chain with a farmer, a supplier and distributor;•Include the yield uncertainty and the farmer’s risk preference in the model;•Investigate the farmer's strategies on farm size and endeavor input separately;•Analyze the effects of the subsidy, the risk-averse degree and the yield uncertainty;•Find the limitations of the subsidy policy based on farm size.