Optimal Contract Design in Contract Farming under Asymmetric Effort Information
Chunhua Tang,
Huiyuan Zhang and
Jiamuyan Xie ()
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Chunhua Tang: School of Business and Administration, Hunan University of Finance and Economics, Changsha 410079, China
Huiyuan Zhang: School of Economic and Trade, Hunan University, Changsha 410079, China
Jiamuyan Xie: School of Economic and Trade, Hunan University, Changsha 410079, China
Sustainability, 2022, vol. 14, issue 22, 1-17
Abstract:
This paper studies the contract design, optimal financing, and pricing decision of the leading agricultural enterprise when the level of effort of the farmer is private information. We use buyer direct finance and add agricultural income insurance to transfer risks to overcome the farmer’s loan difficulty and contract default caused by information asymmetry. We design four kinds of contracts, including the uninsured and symmetric information contract (SN contract), the uninsured and asymmetric information contract (AN contract), the insured and symmetric information contract (SY contract), and the insured and asymmetric information contract (AY contract). Through comparative analysis of the different types of contracts, several results are obtained. First, when there is no insurance, supervision of the leading enterprise can improve the farmer’s level of effort; but supervision costs are incurred, and incentive contracts can avoid the farmer’s moral hazard. Second, agricultural income insurance improves the farmer’s level of effort when information is asymmetric, which transfers risks and saves costs for all the game participants. Third, the leading enterprise prefers an asymmetric information contract and the farmer prefers AN contract when the probability of loan repayment is high.
Keywords: contract farming; information asymmetry; supply chain finance; moral hazard; agricultural income insurance (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:14:y:2022:i:22:p:15000-:d:971377
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