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New auction design for digital agricultural platforms can increase revenue for smallholder farmers and mitigate poverty

MIT Sloan study quantifies impact on farmer profitability

CAMBRIDGE, Mass., Jan. 28, 2020 – Agriculture is a significant part of the economy in most developing countries, yet many farmers persistently struggle with poverty. A key challenge is the lack of infrastructure to improve market access, price transparency, and competition. As part of the research within the MIT Sloan School of Management Food Supply Chain Analytics & Sensing (FSAS) Initiative, Prof. Yanchong (Karen) Zheng and her coauthors studied efforts to improve the welfare of farmers using digital agricultural platforms. The team found that such platforms can significantly increase farmers’ profits by 26% to 159% across a range of crops. They also demonstrated how a newly developed two-stage auction design can boost farmers’ profits by 60% to 158% for a commodity where launching the platform itself has a limited impact.

“World Bank data shows that 78% of the world’s poorest people are farmers and need help, but the traditional agricultural supply chains put them in a challenging position. They are often located in remote rural areas that lack access to resources, advanced technologies, and timely information,” says Zheng. “Several governments have led reforms to improve market and information access for these farmers through digital agricultural platforms. A broad goal of our research is to analyze how we can use these platforms to bring farmers closer to the knowledge, information, and technology they need to lift themselves out of poverty.”

With a seed grant from the Tata Center at MIT, Zheng and MIT Sloan Prof. Retsef Levi, along with their PhD student at the MIT Operations Research Center (ORC), Somya Singhvi, started a collaboration with the state government of Karnataka in India two years ago to help assess the impact of the government’s digital platform called the Unified Market Platform (UMP) on market prices and farmers’ profitability. Their paper, “The impact of unifying agricultural wholesale markets on prices and farmers’ profitability,” offers a rigorous econometric analysis that evaluates the impact of launching such a platform on farmers’ profitability and was published by the Proceedings of the National Academy of Sciences (PNAS).

“We found that the underlying operational and supply chain design of the platform plays a significant role in whether farmers benefit from the initiative. Some crops like rice, peanuts, and corn showed a significant price increase, while other crops like lentils and cotton didn’t benefit from the platform. An important part of our analysis was to highlight how the design of the platform matters for its success,” explains Zheng.

For example, providing integrated logistics can encourage and facilitate cross-market trading; pooling lots of similar quality can further reduce traders’ search costs and enhance bidding efficiency; and optimizing the auction design can increase market competition and strengthen farmers’ bargaining power.

This last point motivated a follow-up study, where the researchers employed a behavior-centric, field-based, data-driven methodology to design more effective auction mechanisms. They designed, analyzed, and implemented a new two-stage auction on the UMP for a major lentils market. The new auction design resulted in a significant profit gain in the range of 60% to 158% for over 10,000 smallholder farmers.

This positive outcome is particularly significant in light of the fact that the original launch of the UMP has not generated a significant benefit for these farmers. Encouraged by this initial success, the Karnataka government is currently expanding the two-stage auction design to other commodities.

“The FSAS Initiative is a multidisciplinary effort to address challenges in the food and agriculture space, and this project is one of many examples of the initiative’s work,” says Zheng. “The findings from these projects are exciting and impactful, and we are proactively working with on-the-ground collaborators in multiple countries to apply our learnings wherever possible.”

Zheng coauthored “The impact of unifying agricultural wholesale markets on prices and farmers’ profitability,” and “Improving farmers’ income on online agri-platforms: Design and field implementation of a two-stage auction with Levi, Singhvi, and Manoj Rajan of Rashtriya e Market Services Private Lmtd. Click here to watch a video about the project.

The MIT Sloan School of Management is where smart, independent leaders come together to solve problems, create new organizations, and improve the world. Learn more at mitsloan.mit.edu

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