Indian Institute of Technology Madras (IIT Madras) Researchers have devised a mathematical model on contract farming to predict farmers’ delivery of commodities using a decision-theoretic framework based on the ‘Prospect Theory.’ The development of the model is targeted to aid policymakers in designing mechanisms that would encourage more firms to offer advance-payment contracts. The model will help calculate the upper and lower bounds of the contracted commodity that ought to be delivered and define the firm’s production quantity. This will enable the profitability limits to be set with more precision than existing methods. The IIT Madras model, based on contract farming, also suggests the optimal timing for paying the advances to the farmers using two different strategies – one that favors the firm’s profit maximisation objective, while the other only maximises its marginal cost savings from contracting to create a socially inclusive payment policy. The second strategy substantially improves the farmers’ welfare, especially those with smaller landholdings and limited access to credit, while simultaneously keeping the firm’s profitability primarily unaffected. The development of the model is targeted to aid policymakers in designing such mechanisms that would encourage more firms to offer advance-payment contracts. It can also be used to shortlist the eligible farmers to whom the contracts are to be offered, considering their need for advance payments.
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