The Role of Ambiguity Aversion in Contract-farming Supply Chains: A Distributionally Robust Approach

Contract farming is an important tool to promote the agricultural development in the developing countries. In this paper, we study three types of contracts commonly used in a contract-farming agricultural supply chain with a farmer and an agribusiness firm, including fixed procurement price contract, market spot price contract and protection procurement price contract. To accurately capture the correlation between uncertainties and avoid the misspecification of true distribution, a moment-based distributionally robust optimization framework is introduced to analyze the three contracts. We then derive equilibrium solutions of both the farmer and the agribusiness firm under each price contract. Leveraging these results, we can prove that the protection procurement price contract is equivalent to either the fixed procurement price contract or the market spot price contract, which depends on under which contract the farmer can obtain a larger marginal revenue. We further investigate the intrinsic mechanism of the protection procurement price contract, including its impact on the performance of both contract parties and the entire supply chain. Finally, we provide numerical comparisons of our ambiguity-averse solution with the ambiguity-neutral one and also discuss the impact of demand and yield unertainties on the equilibrium profits of both contract parties.