Tip Your Farmer? Implications of Tipping on Smallholder Welfare in Agricultural Supply Chains

Problem definition: An emerging financial innovation enabled by technological advancements in agricultural supply chains is the ability to “tip the farmers.” This mechanism empowers socially conscious consumers to identify and support the individual farmers of their products by sending them direct payments, or tips. We shed light on the implications of tipping on different market participants. Methodology/results: We construct a game-theoretic model that captures the interactions between a mass of infinitesimal farmers, a population of socially conscious consumers, and an agricultural firm that plays the intermediary role between farmers and consumers. We characterize the equilibrium of the game with and without tipping and identify conditions under which each group of key stakeholders (farmers, consumers, and the agricultural firm) may be better or worse off with tipping. If implemented under the right conditions, tipping can create a triple win for all supply chain members, including every individual farmer. This happens when farmers’ outside option takes moderate values and the consumers’ social consciousness is sufficiently high. In contrast, when these conditions are violated, farmers and/or consumers could be worse off after the implementation of tipping. Furthermore, even in situations where farmers benefit from tipping in expectation, tipping may exacerbate inequity in the farmer population, which is undesirable from a social responsibility standpoint. Adverse outcomes such as these occur in parameter regions wherein the firm exploits the consumers’ tips to lower its sourcing costs by reducing its wholesale price commitment to farmers. Managerial implications: Caution must be exercised in implementing a tipping program, as it may lead to a reduction in farmers’ expected and/or realized incomes as well as consumer welfare. Even when the firm commits to not adjusting the wholesale price a priori, tipping can be detrimental to the firm while helping consumers and farmers. Funding: This research was funded in part by the National Science Foundation [Award 2049872]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2021.0059 .