Improving Cash-Constrained Smallholder Farmers’ Revenue: The Role of Government Loans

Abstract

Problem definition: Extreme poverty continues to persist among smallholder farmers in developing countries. One critical challenge faced by these farmers is that the need for immediate cash often forces them to sell their crops when market price is low, thus hurting their revenue. This paper examines how cash constraints influence farmers' selling decisions across the harvest and lean seasons, as well as to analyze the efficacy of government loan programs in improving farmers' revenue.

Methodology: We develop a game-theoretic model to fully characterize the market equilibrium under the base scenario of no government loan, uncovering the differential 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 of immediate cash. We analyze and contrast two types of loan policies, one in which all farmers are eligible to access the loan (defined as a homogeneous loan) and the other in which the loan is only offered to farmers whose production quantity is below a certain threshold (defined as a heterogeneous loan).

Managerial Implications: Our results demonstrate when access to the loan may benefit farmers and when a heterogeneous policy is more desirable. We show that, when designed properly, the loan can simultaneously increase aggregate farmer revenue and generate more equitable revenue distribution among the farmers. Nevertheless, we also highlight that overly generous loan policies may be counterproductive and inadvertently hurt farmers' revenue. Taken together, these results underscore that government loan policy design must carefully account for farmers' strategic response to the policy in order to generate positive societal outcomes. Finally, we use field data of Bengal gram farmers in India to empirically validate our modeling insights and quantify the revenue impact of the loan policies studied.

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