Tip Your Farmer? Implications of Tipping in Agriculture on Sustainability and Financial Inclusion

Abstract

An emerging financial innovation enabled by technological advancements in agricultural supply chains is the capability to “tip the farmers.” This innovation empowers socially-conscious customers to identify the individual farmers of their sustainably-sourced products and reward these farmers by sending them direct payments, or tips, through mobile apps. To shed light on the implications of a tipping mechanism on different market participants, we construct a model that captures the interactions between a mass of infinitesimal farmers, a population of socially-conscious customers, and an agricultural firm who plays the intermediary role between farmers and customers. We characterize the equilibrium of the game with and without tipping and show how different types of equilibria emerge depending on the model parameters. We investigate the implications of tipping on various stakeholders such as farmers, customers, and the agricultural firm and identify the conditions under which they may be better off or worse off. In particular, we show that if tipping is implemented under the right conditions, it can create a triple win for all supply chain members including every individual farmer. When these conditions do not hold, in contrast, farmers and/or consumers could be worse off in the presence of tipping. Further, even in situations where farmers benefit from tip-ping in expectation, this financial innovation entails disparity and exacerbates inequity in the farmer population, which is undesirable from a social responsibility standpoint. Thus, firms must exercise caution in implementing the tipping capability as it may lead to a reduction in farmers’ expected and actual income and consumer welfare.

Keywords: agriculture, farming, supply chain finance, developing economies, tipping, Blockchain

JEL Classification: M10