Weather Risk–Reward Contract for Sustainable Agri-Food Supply Chain with Loss-Averse Farmer

Abstract

Compared with the traditional agri-food supply chain (AFSC) whose only goal is to maximize economic benefits, the sustainable agri-food supply chain (SAFSC) starts to attract more attention. Typical challenges faced by SAFSC development are unfair pricing of produce, yield uncertainty caused by adverse weather, as well as conflict and cooperation between stakeholders and sustainable activities of SAFSC. In this paper, we establish a two-echelon decision-making model consisting of a loss-averse farmer and a loss-neutral company. A guaranteed price mechanism is contrived to mitigate the effects of uncertain procurement price on the farmers’ profit. It is found that this mechanism can improve the sustainable investment level but fails to reach the optimal level of the SAFSC system. Thus, a risk–reward contract taking into account the weather index (temperature) and the degree of loss aversion is designed. Results show that this contract can settle the distortion of the sustainable investment level and effectively motivate farmers to participate in the sustainable agricultural practice. Furthermore, we derive the conditions on the contract parameters under which both the company and the farmer are motivated to exert efforts to stand by sustainable agricultural practice.