Optimal Supply Chain Contracts

Chen, Ying-Ju; Gui, Zhengqing; Thadden, Ernst‐Ludwig von; Zhao, Xiaojian

doi:10.2139/ssrn.2826319

Cited by 2 publications

(1 citation statement)

References 18 publications

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“…The classical second‐best

\pi ^c

is an upper bound for static settings (Tirole, 1988). Using nonlinear pricing, it can internalize the vertical externality of double marginalization , a well‐known inefficiency of spot markets and linear pricing (Chen, Gui, et al., 2021). However, contract farming often seeks long‐term relationships with dynamic incentives.…”

Section: Preliminary Results: Two Benchmarksmentioning

confidence: 99%

Dynamic incentives for sustainable contract farming

Zhang

Gao

Zolghadr

et al. 2023

Production and Operations Management

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The rise of contract farming has transformed millions of farmers' lives. We study a new class of contract farming problems, where the farmer holds superior information and can invest effort to improve productivity over time. Despite their prevalence, the literature offers little guidance on how to manage such farmers with dynamic incentives. We build a game-theoretic model that captures the dynamic incentives of learning and gaming, with hidden action and information. We characterize the optimal contract: it internalizes both the vertical and intertemporal externalities, with performance pay and deferred payment; the performance pay is to motivate the farmer to invest and improve the relationship-specific productivity; the deferred payment is to ensure that the farmer is willing to share information and behave honestly over time. Even with random yield, the optimal contract can still have a simple implementation of a yieldadjusted revenue-sharing policy. Using real data, we show that the learning effect is significant. We then quantify when and how contract farming can improve smallholder farmers' productivity and income, creating shared value. We find when buyers have a long-term perspective and can internalize the benefit of farmer improvement, they will pay higher prices to ensure farmers' long-term viability. Our results inform the policy debate on contract farming: traditional procompetitive policies (based on spot transactions) can be counterproductive for modern agrifood value chains, hurting both buyers and farmers.

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“…The classical second‐best

\pi ^c

Section: Preliminary Results: Two Benchmarksmentioning

confidence: 99%

Dynamic incentives for sustainable contract farming

Zhang

Gao

Zolghadr

et al. 2023

Production and Operations Management

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Incentive-compatibility, limited liability and costly liquidation in financial contracting

Gui

Thadden

Zhao

2019

Games and Economic Behavior

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We characterize an optimal financial contract when the firm's realized cash flow is unobservable to the investor and the firm's collateral can only be liquidated partially by resorting to the services of a costly third party. An optimal contract may exhibit a piecewise structure and vary with the liquidation cost and the firm's actual liquidity shortage. Partial liquidation and wholesale transfers of collateral can coexist in an optimal contract. In contrast to part of the literature, the incentive-compatibility constraint incorporates the firm's limited liability, and may be slack at the optimum. Allowing the firm to overcome an ex-post liquidity shortage by borrowing surreptitiously from a third party may reduce the firm's ex-ante expected utility.

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Optimal Supply Chain Contracts

Cited by 2 publications

References 18 publications

Dynamic incentives for sustainable contract farming

Dynamic incentives for sustainable contract farming

Incentive-compatibility, limited liability and costly liquidation in financial contracting

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