How to design an incentive mechanism of enterprises to farmers in contract farming considering reciprocity preference

Abstract

<p style='text-indent:20px;'>In the process of contract fulfillment, more informed farmers may not work hard, which has seriously affected the sustainability of contract farming. An enterprise with reciprocity preference tends to make a contract that both improves farmers' welfare and brings enough profit to sustain its own operations, while a farmer with reciprocity will work hard in return for the enterprise's reward. In this paper, we develop a non-profit index principal-agent model between enterprises and farmers, assuming both have reciprocity preference, to investigate how to design an incentive mechanism in contract farming. We solve principal-agent problem with the assumption that farmers' expected certainty income premium (ECIP) is constant or farmers' ECIP is a function of enterprise payment difference (EPD). The results show that enterprises with reciprocity preference could establish an incentive mechanism according to following approaches: (a) When the enterprise is unable to afford extra rewards to farmers, each incentive coefficient should be determined according to the influence of the task on the order income. (b) When the enterprise can stimulate the farmers' planting enthusiasm by paying more extra rewards, he should pay promptly attention to the farmers who increase the effort degree firstly and give rewards to them.</p>