Abstract
Government subsidies are common in the agricultural sector to protect farmers from unexpected losses. Two major forms of agricultural subsidies include price protection, under which farmers are subsidized when the market price is low, and yield protection, under which farmers are subsidized when the crop yield is low. While price protection is popular in both developed and emerging economies, implementing yield protection in emerging economies is challenging due to the high costs of yield assessment for small farms. This research examines the design of a recently emerged index-based yield protection policy, which triggers subsidies when a pre-determined index, such as rainfall, predicts a low yield, thereby avoiding costly yield assessment. Our investigation leads to several intriguing insights. First, we find that while an increase in index-based subsidy can increase farmers' expected income, it can also increase income variability due to imperfect yield prediction of the index. Based on this result, we uncover a non-monotonic relationship between the accuracy of the index and the optimal subsidy. Second, we demonstrate that price and yield protection, often seen as strategic substitutes, can act as strategic complements if index accuracy is low. Lastly, we discover that, unexpectedly, a tighter government budget might result in greater investment in index accuracy. Together, these findings contribute to a more nuanced understanding of index-based yield protection and support the crafting of efficient agricultural subsidies.
Bio
Jing-Sheng Jeannette Song is the R. David Thomas Professor of Business Administration and a Professor of Operations Management at the Fuqua School of Business of Duke University. She studies various facets of supply chain management and operations strategy. Her recent research covers topics like supply chain digitization, data-driven operations decision making, inventory strategies to enhance supply chain resilience, and responsible operations. She has published numerous articles in leading academic journals, such as Management Science, Operations Research, and Manufacturing & Service Operations Management. She has edited and co-edited two books, “Research Handbook on Inventory Management” and “Supply Chain Structures: Coordination, Information and Optimization.” She has also co-authored the book “The Art of Matching: Joy of Living and Operations Innovations” (in Chinese). Professor Song is an INFORMS Fellow and a MSOM Fellow. She is also a Department Editor for Management Science and Service Science, and a former Area Editor for Operations Research and IIE Transactions.
