Improving Cash-constrained Smallholder Farmers' Revenue: The Role of Government Loans

Abstract

This paper examines how cash constraints influence farmers' selling decisions across the harvest and lean seasons, and analyzes the efficacy of government loans in improving farmers' revenue. We develop a game-theoretic model to characterize the market equilibrium under the base scenario of no government loan, uncovering the impacts of cash constraints on the revenue of farmers with different production quantities. We then examine how a government loan program may counteract these negative impacts. Under a government loan, farmers store some of their production quantities at government warehouses in exchange for immediate cash. We analyze and contrast two types of loan policies, one in which all farmers are eligible for the loan (a homogeneous loan) and the other in which the loan is only offered to farmers whose production quantity is below a certain threshold (a heterogeneous loan). Our results demonstrate that heterogeneous loans are more desirable when cash constraints are moderately high. We further show that, when designed properly, the loan can simultaneously increase aggregate farmer revenue and generate more equitable revenue distribution among the farmers. Taken together, these results underscore that government loan design must carefully account for farmers' strategic response to the policy to generate positive societal outcomes. Finally, we use field data of Bengal gram farmers in India to empirically validate our insights and quantify the revenue impact of the policies studied.

Keywords: socially responsible operations, smallholder farmers, cash constraints, government loan, policy design