Improving Cash-Constrained Smallholder Farmers’ Revenue: The Role of Government Loans

This paper examines how the need for immediate cash by smallholder farmers may lead to undesirable selling decisions that hurt their revenue and analyzes the efficacy of government loan policies in tackling this challenge. We develop a game-theoretic model to characterize the base scenario of no loan, uncovering the impacts of cash needs on farmers’ revenue. We then examine how a government loan, under which farmers store some of their production at government warehouses in exchange for immediate cash, may counteract these negative impacts. We analyze and optimize two types of policies: one in which all farmers are eligible (a homogeneous loan) and another in which the loan is offered only to farmers whose production is below a certain threshold (a heterogeneous loan). Our results demonstrate that, when designed properly, both loans simultaneously increase aggregate farmer revenue and generate a more equitable revenue distribution among farmers. Nonetheless, overly generous loans can be counterproductive and harm farmers. We further show that heterogeneous loans achieve optimal market outcomes with lower government expenditure when cash needs are moderately high. We then contrast the two policies across key metrics related to farmers. Whereas the homogeneous loan better mitigates inequity among farmers, the heterogeneous loan helps more farmers meet cash needs. These results underscore that government loan design must carefully account for farmers’ strategic responses to the policy to generate positive societal outcomes. Finally, we use field data from India to numerically illustrate our insights and demonstrate the economic impacts of the policies studied. This paper was accepted by Jeannette Song, operations management. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.06206 .