IDEAS home Printed from https://ideas.repec.org/a/eee/jomega/v117y2023ics030504832200233x.html
   My bibliography  Save this article

The Role of Ambiguity Aversion in Contract-farming Supply Chains: A Distributionally Robust Approach

Author

Listed:
  • Zhong, Yuanguang
  • Liu, Ju
  • Zhou, Yong-Wu
  • Cao, Bin
  • Zheng, Xueliang

Abstract

Contract farming is an important tool to promote the agricultural development in the developing countries. In this paper, we study three types of contracts commonly used in a contract-farming agricultural supply chain with a farmer and an agribusiness firm, including fixed procurement price contract, market spot price contract and protection procurement price contract. To accurately capture the correlation between uncertainties and avoid the misspecification of true distribution, a moment-based distributionally robust optimization framework is introduced to analyze the three contracts. We then derive equilibrium solutions of both the farmer and the agribusiness firm under each price contract. Leveraging these results, we can prove that the protection procurement price contract is equivalent to either the fixed procurement price contract or the market spot price contract, which depends on under which contract the farmer can obtain a larger marginal revenue. We further investigate the intrinsic mechanism of the protection procurement price contract, including its impact on the performance of both contract parties and the entire supply chain. Finally, we provide numerical comparisons of our ambiguity-averse solution with the ambiguity-neutral one and also discuss the impact of demand and yield unertainties on the equilibrium profits of both contract parties.

Suggested Citation

  • Zhong, Yuanguang & Liu, Ju & Zhou, Yong-Wu & Cao, Bin & Zheng, Xueliang, 2023. "The Role of Ambiguity Aversion in Contract-farming Supply Chains: A Distributionally Robust Approach," Omega, Elsevier, vol. 117(C).
    • Handle: RePEc:eee:jomega:v:117:y:2023:i:c:s030504832200233x
    DOI: 10.1016/j.omega.2022.102827
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S030504832200233X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.omega.2022.102827?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:hal:journl:halshs-01090500 is not listed on IDEAS
    2. Saed Alizamir & Foad Iravani & Hamed Mamani, 2019. "An Analysis of Price vs. Revenue Protection: Government Subsidies in the Agriculture Industry," Management Science, INFORMS, vol. 65(1), pages 32-49, January.
    3. Agbo, Maxime & Rousselière, Damien & Salanié, Julien, 2015. "Agricultural marketing cooperatives with direct selling: A cooperative–non-cooperative game," Journal of Economic Behavior & Organization, Elsevier, vol. 109(C), pages 56-71.
    4. Maxime Agbo & Damien Rousselière & Julien Salanié, 2015. "Agricultural Marketing Cooperatives with Direct Selling : A Cooperative Non Cooperative Game," Post-Print halshs-01208281, HAL.
    5. Liu, Hengyu & Zhang, Juliang & Zhou, Chen & Ru, Yihong, 2018. "Optimal purchase and inventory retrieval policies for perishable seasonal agricultural products," Omega, Elsevier, vol. 79(C), pages 133-145.
    6. Karthik Natarajan & Melvyn Sim & Joline Uichanco, 2018. "Asymmetry and Ambiguity in Newsvendor Models," Management Science, INFORMS, vol. 64(7), pages 3146-3167, July.
    7. Ming Hu & Yan Liu & Wenbin Wang, 2019. "Socially Beneficial Rationality: The Value of Strategic Farmers, Social Entrepreneurs, and For-Profit Firms in Crop Planting Decisions," Management Science, INFORMS, vol. 65(8), pages 3654-3672, August.
    8. Qiu, Ruozhen & Sun, Yue & Sun, Minghe, 2022. "A robust optimization approach for multi-product inventory management in a dual-channel warehouse under demand uncertainties," Omega, Elsevier, vol. 109(C).
    9. Thomas J. Holmes & Sanghoon Lee, 2012. "Economies of Density versus Natural Advantage: Crop Choice on the Back Forty," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 1-19, February.
    10. Rao, Elizaphan J.O. & Qaim, Matin, 2011. "Supermarkets, Farm Household Income, and Poverty: Insights from Kenya," World Development, Elsevier, vol. 39(5), pages 784-796, May.
    11. Jonkman, Jochem & Barbosa-Póvoa, Ana P. & Bloemhof, Jacqueline M., 2019. "Integrating harvesting decisions in the design of agro-food supply chains," European Journal of Operational Research, Elsevier, vol. 276(1), pages 247-258.
    12. Dimitris Bertsimas & Ioana Popescu, 2002. "On the Relation Between Option and Stock Prices: A Convex Optimization Approach," Operations Research, INFORMS, vol. 50(2), pages 358-374, April.
    13. Ahumada, Omar & Rene Villalobos, J. & Nicholas Mason, A., 2012. "Tactical planning of the production and distribution of fresh agricultural products under uncertainty," Agricultural Systems, Elsevier, vol. 112(C), pages 17-26.
    14. Chan, Rebecca & Li, Zhaolin & Matsypura, Dmytro, 2020. "Assortment optimisation problem: A distribution-free approach," Omega, Elsevier, vol. 95(C).
    15. Dimitris Bertsimas & Xuan Vinh Doan & Karthik Natarajan & Chung-Piaw Teo, 2010. "Models for Minimax Stochastic Linear Optimization Problems with Risk Aversion," Mathematics of Operations Research, INFORMS, vol. 35(3), pages 580-602, August.
    16. Miyata, Sachiko & Minot, Nicholas & Hu, Dinghuan, 2009. "Impact of Contract Farming on Income: Linking Small Farmers, Packers, and Supermarkets in China," World Development, Elsevier, vol. 37(11), pages 1781-1790, November.
    17. Zhu, Jianhua, 2007. "Three essays on contract farming in China," ISU General Staff Papers 2007010108000016589, Iowa State University, Department of Economics.
    18. Narayanan, Sudha, 2014. "Profits from participation in high value agriculture: Evidence of heterogeneous benefits in contract farming schemes in Southern India," Food Policy, Elsevier, vol. 44(C), pages 142-157.
    19. Mirzapour Al-e-hashem, S.M.J. & Malekly, H. & Aryanezhad, M.B., 2011. "A multi-objective robust optimization model for multi-product multi-site aggregate production planning in a supply chain under uncertainty," International Journal of Production Economics, Elsevier, vol. 134(1), pages 28-42, November.
    20. Niu, Baozhuang & Jin, Delong & Pu, Xujin, 2016. "Coordination of channel members’ efforts and utilities in contract farming operations," European Journal of Operational Research, Elsevier, vol. 255(3), pages 869-883.
    21. Awi Federgruen & Upmanu Lall & A. Serdar Şimşek, 2019. "Supply Chain Analysis of Contract Farming," Manufacturing & Service Operations Management, INFORMS, vol. 21(2), pages 361-378, April.
    22. Qiaoming Han & Donglei Du & Luis F. Zuluaga, 2014. "Technical Note---A Risk- and Ambiguity-Averse Extension of the Max-Min Newsvendor Order Formula," Operations Research, INFORMS, vol. 62(3), pages 535-542, June.
    23. Zhong, Yuanguang & Liu, Ju & Zhou, Yong-Wu & Cao, Bin & Cheng, T.C. Edwin, 2022. "Robust contract design and coordination under consignment contracts with revenue sharing," International Journal of Production Economics, Elsevier, vol. 253(C).
    24. Jinfeng Yue & Bintong Chen & Min-Chiang Wang, 2006. "Expected Value of Distribution Information for the Newsvendor Problem," Operations Research, INFORMS, vol. 54(6), pages 1128-1136, December.
    25. Martin A. Lariviere & Evan L. Porteus, 2001. "Selling to the Newsvendor: An Analysis of Price-Only Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 3(4), pages 293-305, May.
    26. I Moon & E A Silver, 2000. "The multi-item newsvendor problem with a budget constraint and fixed ordering costs," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 51(5), pages 602-608, May.
    27. repec:hal:journl:halshs-01098762 is not listed on IDEAS
    28. Behzadi, Golnar & O’Sullivan, Michael Justin & Olsen, Tava Lennon & Zhang, Abraham, 2018. "Agribusiness supply chain risk management: A review of quantitative decision models," Omega, Elsevier, vol. 79(C), pages 21-42.
    29. Candace Arai Yano & Hau L. Lee, 1995. "Lot Sizing with Random Yields: A Review," Operations Research, INFORMS, vol. 43(2), pages 311-334, April.
    30. Yunzeng Wang & Li Jiang & Zuo-Jun Shen, 2004. "Channel Performance Under Consignment Contract with Revenue Sharing," Management Science, INFORMS, vol. 50(1), pages 34-47, January.
    31. Soo-Haeng Cho & Christopher S. Tang, 2013. "Advance Selling in a Supply Chain Under Uncertain Supply and Demand," Manufacturing & Service Operations Management, INFORMS, vol. 15(2), pages 305-319, May.
    32. Burak Kazaz, 2004. "Production Planning Under Yield and Demand Uncertainty with Yield-Dependent Cost and Price," Manufacturing & Service Operations Management, INFORMS, vol. 6(3), pages 209-224, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jiguang Chen & Ying‐Ju Chen, 2021. "The Impact of Contract Farming on Agricultural Product Supply in Developing Economies," Production and Operations Management, Production and Operations Management Society, vol. 30(8), pages 2395-2419, August.
    2. Zhong, Ling & Nie, Jiajia & Yue, Xiaohang & Jin, Minyue, 2023. "Optimal design of agricultural insurance subsidies under the risk of extreme weather," International Journal of Production Economics, Elsevier, vol. 263(C).
    3. Saed Alizamir & Foad Iravani & Hamed Mamani, 2019. "An Analysis of Price vs. Revenue Protection: Government Subsidies in the Agriculture Industry," Management Science, INFORMS, vol. 65(1), pages 32-49, January.
    4. Cao, Yu & Yi, Chaoqun & Wan, Guangyu & Hu, Hanli & Li, Qingsong & Wang, Shouyang, 2022. "An analysis on the role of blockchain-based platforms in agricultural supply chains," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 163(C).
    5. Sushil Gupta & Hossein Rikhtehgar Berenji & Manish Shukla & Nagesh N. Murthy, 2023. "Opportunities in farming research from an operations management perspective," Production and Operations Management, Production and Operations Management Society, vol. 32(6), pages 1577-1596, June.
    6. Fei Ye & Qiang Lin & Yina Li, 2020. "Coordination for contract farming supply chain with stochastic yield and demand under CVaR criterion," Operational Research, Springer, vol. 20(1), pages 369-397, March.
    7. van Eekelen, Wouter, 2023. "Distributionally robust views on queues and related stochastic models," Other publications TiSEM 9b99fc05-9d68-48eb-ae8c-9, Tilburg University, School of Economics and Management.
    8. Xiaolong Guo & Lihong Cheng & Yugang Yu, 2022. "Government subsidy policy for green and efficient raw materials considering farmer heterogeneity," Production and Operations Management, Production and Operations Management Society, vol. 31(11), pages 4095-4112, November.
    9. Qian, Xiaoyan, 2021. "Production planning and equity investment decisions in agriculture with closed membership cooperatives," European Journal of Operational Research, Elsevier, vol. 294(2), pages 684-699.
    10. Hong, Xianpei & He, Yimeng & Zhou, Pin & Chen, Jiguang, 2023. "Demand information sharing in a contract farming supply chain," European Journal of Operational Research, Elsevier, vol. 309(2), pages 560-577.
    11. Tuğçe Taşkıner & Bilge Bilgen, 2021. "Optimization Models for Harvest and Production Planning in Agri-Food Supply Chain: A Systematic Review," Logistics, MDPI, vol. 5(3), pages 1-27, August.
    12. Benali, Marwan & Brümmer, Bernhard & Afari-Sefa, Victor, 2017. "Small producer participation in export vegetable supply chains and poverty: evidence from different export schemes in Tanzania," GlobalFood Discussion Papers 262583, Georg-August-Universitaet Goettingen, GlobalFood, Department of Agricultural Economics and Rural Development.
    13. Cai, Jianhu & Hu, Xiaoqing & Jiang, Feiying & Zhou, Qing & Zhang, Xiaoyang & Xuan, Liyuan, 2019. "Optimal input quantity decisions considering commitment order contracts under yield uncertainty," International Journal of Production Economics, Elsevier, vol. 216(C), pages 398-412.
    14. Pagare, Dewang & Biswas, Indranil & Agrahari, Amit & Ghosh, Sriparna, 2023. "A small farmer’s market choice in the presence of multiple markets: The Indian case," European Journal of Operational Research, Elsevier, vol. 311(2), pages 739-753.
    15. Herrmann, Raoul T., 2017. "Large-Scale Agricultural Investments and Smallholder Welfare: A Comparison of Wage Labor and Outgrower Channels in Tanzania," World Development, Elsevier, vol. 90(C), pages 294-310.
    16. Nilanjan Dutta & Arshinder Kaur, 2023. "Enabling socially responsible operations: A decision-making model for a firm contracting with decision-biased smallholders," Annals of Operations Research, Springer, vol. 320(1), pages 509-533, January.
    17. Maertens, Miet & Vande Velde, Katrien, 2017. "Contract-farming in Staple Food Chains: The Case of Rice in Benin," World Development, Elsevier, vol. 95(C), pages 73-87.
    18. Khan, Muhammad Fawad & Nakano, Yuko & Kurosaki, Takashi, 2019. "Impact of contract farming on land productivity and income of maize and potato growers in Pakistan," Food Policy, Elsevier, vol. 85(C), pages 28-39.
    19. Wei Zhang & Long Gao & Mohammad Zolghadr & Dawei Jian & Mohsen ElHafsi, 2023. "Dynamic incentives for sustainable contract farming," Production and Operations Management, Production and Operations Management Society, vol. 32(7), pages 2049-2067, July.
    20. Seung Hwan Jung, 2020. "Offshore versus Onshore Sourcing: Quick Response, Random Yield, and Competition," Production and Operations Management, Production and Operations Management Society, vol. 29(3), pages 750-766, March.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jomega:v:117:y:2023:i:c:s030504832200233x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/375/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.