Mechanism Selection And Coordination For Contract Farming Supply Chain Under Prospect Theory

With the Prospect Theory, the decision making model for “Company+Farmer”Contract-Farming supply chain consists of a single company and a single farmer is proposedby taking the characteristics of Contract-Farming. The agricultural production processuncertainty (the natural random factors), the market demand uncertainty (the market randomfactors), the farmer’s loss aversion and other factors are concerned with the company or thefarmer decision making behavior through modeling the three mechanisms ("sharing cost”mechanism,“stock-out punishing” mechanism and “sharing cost+stock-out punishing” mixmechanism) which aim at putting forward to the more robust and operational contractmechanism for the company and the farmer, and for purpose of strengthening the robustnessof order and improving the benefits of both the company and the farmer.First of all, the centralized optimal decision behaviors have been studied of the supplychain. The results show that the agricultural product’s optimal input quantity will be increasedwith the increasing of retail price, while the optimal input is decreased with the increasingproduction cost coefficient.Then, we derive the optimal decisions of the company and the risk-neutral farmer in theContract-Farming supply chain with “cost sharing” mechanism,“stock-out punishing”mechanism and “cost sharing+stock-out punishing” mix mechanism under stochasticenvironment. Also whether the three contract forms coordinate the supply chain or not isinvestigated. Through the numerical analysis, the results show that the “cost-sharing”mechanism can coordinate the supply chain under certain conditions. Naturally, thecompany’s and the farmer’s expected profit under the “cost-sharing” mechanism are improvedthan under the No mechanism.Finally, we are studying the “Company+Farmer” Contract-Farming supply chaincontract mechanism in the stochastic environment under the three contract forms while thefarmer is loss-averse. The value function in Prospect theory is applied to the farmers’objective decision functions to analyze the effect of the loss-averse level of the farmer onoptimal decision behaviors of the farmer and the company. The results show that theloss-averse farmer’s input quantity increases with the degree of its own loss-aversionincreases. Compare to the No mechanism, the three contract forms all improve the coefficientof the farmer’s input quantity to the company’s order quantity regardless of its own degree ofthe loss aversion. Furthermore, through the numerical analysis, though the "sharing cost”mechanism, the mix mechanism and the No mechanism is likely to be the perfect choice for the farmer and the company which is relate to the farmer’s loss aversion level, the yieldvariance and the demand variance, it’s difficult for the three contract forms to coordinatesupply chain. However, the "cost sharing” mechanism and the “cost sharing+stock-outpunishing” mix mechanism have the significance of existence under certain conditions. Inaddition, the numerical analysis shows that the company’s and the farmer’s revenue are Paretoimprovement under the two mechanism when the farmer is loss-averse, and the “Company+Farmer” Contract-Farming supply chain is also likely achieved coordination perfectly bychanging the cost sharing coefficient and the penalty coefficient.