Working Paper
Problem Definition: Large buyers of agricultural commodities (e.g., hazelnuts, cocoa, coffee) have launched programs to improve smallholder farmers’ yields. Could such programs effectively alleviate farmer poverty, while maximizing buyers’ profit?
Methodology/Results: Using a Cournot competitive model, we model the interaction between smallholder farmers with heterogeneous productivity and buyers. One of the buyers spearheads a yield-improvement program, helping some farmers increase their mean production and reduce their yield variability. We show that the focal buyer and farmers have divergent preferences regarding the program’s benefits: Whereas buyers aim to secure lower prices through higher production levels, farmers prioritize reducing the volatility they face. These diverging preferences have implications for how they feel about the program and how they would like it to be configured: If the mean yield increase induced by the program is sufficiently large (resp. sufficiently small), the buyer’s profit is maximized by enrolling the most (resp. least) productive farmers, whereas aggregate farmer welfare is maximized by enrolling the least (resp. most) productive farmers. Alignment of objectives is achievable when the program offers balanced improvements in mean and in variability. Still, the program may not result in a win-win outcome unless the buyer is willing to enroll farmers with a consideration of the aggregate farmer welfare or offers price premiums—although the latter may accentuate farmer wealth inequalities.
Managerial Implications: Our study challenges the common belief that all farmers always benefit from improved yields by distinguishing improvements in mean yield from those in their variability. It also stresses that such programs affect the whole farmer ecosystem, not only the targeted group.
Faculty
Professor of Technology and Operations Management
