Optimal strategies of contract‐farming supply chain under the cooperative mode of bank‐insurance: loan guarantee insurance versus yield insurance

Abstract We investigate the impact of two insurance mechanisms: loan guarantee insurance and yield insurance, on a capital‐constrained contract‐farming supply chain where the farmer is risk‐averse and faces yield uncertainty. Using the sequential model, we derive the farmer's optimal farm size, the agrodealer's optimal wholesale price and the insurance company's optimal premium rate. The result shows that under both insurance mechanisms, premium subsidies can promote the farmer to increase the farm size. However, we find that under loan guarantee insurance, when the premium subsidy is relatively high, the farmer's farm size increases with the poor harvest risk. Under yield insurance, the farmer's conditional value‐at‐risk (CVaR) value increases with respect to the premium subsidy rate. Under loan guarantee insurance, the premium rate increases with respect to the premium subsidy. As a result, the farmer's CVaR value decreases with respect to the premium subsidy rate when it is relatively high. Further analysis indicates that with the same government subsidy expenditure, the efficiency of premium subsidies to increase the farmer's production quantity is better under loan guarantee insurance mode, but the efficiency of premium subsidies to increase the farmer's CVaR value is better under yield insurance.