Agricultural supply chain finance considering interest or direct subsidy by government

Abstract

In practice, interest subsidy and direct subsidy are implemented by many governments to alleviate the financial burdens on farmers who seek loans from banks. However, the issues regarding whether these subsidies should be adopted and which subsidy policy is more effective under bank financing remain underexplored. To address the gap, this paper investigates the impact of distinct subsidy policies on capital-constrained farmers, as well as on consumers and society under bank financing. We establish an agricultural supply chain involving two competing farmers, a bank and a government, wherein the two farmers are heterogeneous in their production costs, and the government provides interest subsidy or direct subsidy to them. By deriving and comparing the equilibrium results among three models (bank financing without government subsidy, bank financing with interest subsidy, and bank financing with direct subsidy), we derive the following main findings: First, when the unit production costs between the farmers are relatively unbalanced, an escalation in the government subsidy rate (interest/direct subsidy rate) results in a decrease in both the planting quantity and the profit of the farmer with a lower unit production cost. Second, the preference for government subsidy policies between the farmers is contingent on the unit production cost gap. Both farmers opt for the same subsidy policy when the unit cost gap is immaterial, while they prefer different subsidy policies when the unit cost disparity is significant. Third, government subsidies may not always be beneficial to the individual farmers, the collective farmers, consumers, and society. Moreover, the selection of the optimal subsidy policy is contingent on the interest subsidy rate and the expected market potential. Collectively, these findings highlight the important role of government subsidies in influencing farmers, consumers and society.