Financing Format in an Agricultural Supply Chain With Default Risk

ABSTRACT This study addresses the gap in existing research by examining how default risk and bankruptcy risk influence financing format choices in agricultural supply chains characterized by yield uncertainty and diseconomies of scale. Using a two‐period model, we analyze the equilibrium outcomes of direct financing (DF) and guarantee financing (GF) for a representative family farm facing production‐period default risk and sales‐period bankruptcy risk. Key findings reveal that lower default risk incentivizes the family farm to increase investment, benefiting both parties, while bankruptcy risk emerges conditionally—depending on output distribution—prompting strategic input reduction to avoid insolvency. The family farm prefers GF when the agricultural firm offers a high risk‐free rate, and both the bank rate and default risk are low; otherwise, DF dominates. For the agricultural firm, GF is optimal under high diseconomies of scale or moderate diseconomies with elevated default risk. Notably, DF and GF can achieve win‐win outcomes under specific conditions, even with discrete output distributions. The introduction of zero‐interest early payment financing (EP) reshapes preferences: EP becomes a viable alternative that aligns incentives, often outperforming DF and GF. This research contributes by systematically integrating agricultural‐specific risks into financing decisions and demonstrating how strategic financing design reconciles conflicting objectives in agricultural supply chains.