Financing the capital-constrained farmer under random yield and investment information asymmetry: bank credit versus trade credit

Abstract

Purpose

Financing the capital-constrained farmers to facilitate the production of agri-products is one of the greatest challenges facing the farming supply chain in the developing countries. In this study, we investigate the optimal financing scheme for the farming supply chain under random yield and investment information asymmetry environment to support rural economic development.

Design/methodology/approach

We analyze a stylized model of farming supply chain where the capital-constrained farmer produces and sells agri-products through the agribusiness firm, and investigate the optimal financing scheme incorporating the investment information asymmetry and the challenge of yield uncertainty.

Findings

The results show that there is no one financing scheme equilibrium dominates for all situations, the financing scheme equilibrium is affected by the bank’s supervision cost to monitor the farmer’s moral hazard behavior, the variance of random yield and the farmer’s initial capital. The preference of the financing scheme for the agribusiness firm may be different from that for the farmer. The agribusiness firm might suffer from overfinancing problem under trade credit financing when the bank’s supervision cost is larger and the farmer’s own initial capital is lower; the higher variance of random yield will flare up the effect.

Practical implications

This study sheds light on the choice of financing scheme under random yield and investment information asymmetry environment. This problem is particularly important for developing economies. Financing the capital-constrained farmers not only increases supplies of food and industrial raw materials, but also reduces poverty. The findings provide managerial implications for practitioners for how to leverage different financing scheme to support rural economic development.

Originality/value

This study develops new theoretical model for farming supply chain financing incorporating the challenge of yield uncertainty and investment information asymmetry, the two prominent factors that would impact the financial risk significantly. We analyze the equilibrium under both bank financing and trade credit financing schemes, and the results suggest that the financing scheme equilibrium is affected by the bank’s supervision cost to monitor the farmer’s moral hazard behavior, the variance of random yield and the farmer’s initial capital. The agribusiness firm might suffer from overfinancing problem under trade credit financing.

Citation

Li, Y., Li, Z. and Ye, F. (2025), "Financing the capital-constrained farmer under random yield and investment information asymmetry: bank credit versus trade credit", Industrial Management & Data Systems, Vol. 125 No. 1, pp. 262-278. https://doi.org/10.1108/IMDS-04-2024-0331