Interplay between the agriculture firm’s guarantee strategy and the e-commerce platform’s loan strategy with risk averse farmers

Abstract

Many agricultural firms procure products from smallholders and sell them on platforms by paying a proportional fee. Generally, smallholders lack capital for production, and e-commerce platforms can provide loans to them. However, smallholders are risk averse, leading them to make conservative production decisions. Additionally, smallholders face bankruptcy risk due to output uncertainty and the interest burden of platforms’ loans. These factors further adversely affect smallholders’ conservative decisions. To alleviate this situation, the firm can provide loan guarantees for smallholders. This study considers a supply chain consisting of risk-averse farmers, an agricultural firm, and an e-commerce platform. The firm first decides the number of farmers to provide guarantees, and then the platform sets loan interest rates for guaranteed and non-guaranteed farmers. Thereafter, the firm decides purchase prices, and each farmer decides his production input. Given the number of guaranteed farmers, we find that the platform will charge each farmer a positive loan interest if the proportional fee is small, but it will offer interest-free (non-negative) loans to guaranteed (non-guaranteed) farmers if the proportional fee is large. Additionally, with the increase in guaranteed farmers, the firm’s profit and the farmers’ utilities are not necessarily monotonic. We further show that guaranteeing a portion of farmers is always detrimental to the firm but may be better for all the farmers. Therefore, it is better for the firm to provide a guarantee to all farmers or just offer no guarantee to any farmer, depending on the magnitudes of proportional fees and the production input efficiency.