Revenue-Sharing contract with government Subsidy: A case of the Indian sugar supply chain

In this research, we study the role of government subsidy in the sugar supply chain in India. Government regulations of sugarcane and sugar prices have been some of the factors leading to distress among farmers and firms. Hence, government aid becomes an integral part of the sugar supply chain . Firms having private information about the production cost of sugar has been identified as the primary cause for failure of a successful contract. The objective of this study is to develop a revenue-sharing arrangement between a firm and a farmer enabled by the government which overcomes the distress among them. In a principal-agent framework, we design a contract offered by the government to the firm. The contract facilitates a revenue-sharing arrangement between the firm and the farmer through the provision of subsidy to the firm. We derive the optimal menu of contract and demonstrate the impact of information asymmetry in the sugar supply chain. Our findings show that in the presence of asymmetry information, the government provides a higher subsidy to the risk neutral firm and a lower subsidy to the risk-averse firm in comparison with the corresponding symmetric information cases. The optimal subsidies provided by the government decreases with increase in the total expected revenue to the firm. The optimal wholesale price of the risk-averse firm decreases with its production cost, while the optimal subsidy which it receives is unaffected. The optimal subsidy and wholesale price of the risk-averse firm are unaffected by the farmer ' s reservation profit.