Socially Beneficial Rationality: The Value of Strategic Farmers, Social Entrepreneurs and For-Profit Firms in Crop Planting Decisions
71 Pages Posted: 4 Oct 2016 Last revised: 25 Sep 2017
Date Written: September 24, 2017
Price fluctuations in agricultural markets are an obstacle to poverty reduction for small-scale farmers in developing countries. We build a micro-foundation to study how farmers of heterogeneous production costs, under price fluctuations, make crop-planting decisions over time to maximize their incomes. We consider both strategic farmers, who rationally anticipate the near-future prices as a basis for making planting decisions, and naive farmers, who shortsightedly react to recent crop prices. The latter behavior may cause recurring over- or under-production, which leads to price fluctuations. We find it important to cultivate a sufficient number of strategic farmers, because their self-interested behavior alone, made possible by sufficient market information, can reduce price volatility and benefit all focal farmers who have no cost advantage. In the absence of strategic farmers, a well-designed pre-season procurement contract, offered by a social entrepreneur or a for-profit firm to a fraction of contract farmers, brings benefit to all focal farmers as well as to the firm itself. More strikingly, the contract not only brings equity in the long run among farmers of the same production cost, but also reduces income disparity over time among farmers of heterogeneous costs, regardless of whether they are contract farmers or not. On the other hand, a non-socially-optimal contract may reflect a social entrepreneur's over-subsidy tendency, or a for-profit firm's speculative incentive to mitigate but not eliminate the market price fluctuation, both preventing farmers from achieving the most welfare.
Keywords: forward-looking farmers, contract farming, poverty reduction, socially responsible operations
JEL Classification: E32, I3, L3, N10, N30, N50, O13, Q1
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