Production and green technology investment strategy for contract-farming supply chain under yield insurance

Abstract

We consider a contract-farming supply chain with multiple farmers and an agro-dealer, where farmers are risk-averse and they invest in green technologies. To hedge the risk of yield uncertainty, farmers can purchase agricultural yield insurance. We build a Stackelberg game model to investigate the optimal decisions of farmers and the agro-dealer. The results show that agricultural competition, yield uncertainty, and farmers’ risk aversion have negative impacts on the farm size and the agrochemical reduction technology input, while the yield insurance has positive impacts. We also show that, for farmers with low initial agrochemical input, yield insurance can reduce the agrochemical inputs per acre, and the total agrochemical inputs despite that the farm size increases. Therefore, yield insurance can reduce agricultural pollution emissions. Despite the result of higher social welfare, more agricultural competition generates higher agricultural pollution emissions because farmers would have no incentive to invest more in green technologies. Furthermore, yield insurance enhances the social welfare if the environmental damage of agrochemicals is low. However, when the environmental damage of agrochemicals is high, the social welfare decreases under the yield insurance.