Sustaining Rainforests and Smallholders by Eliminating Payment Delay in a Commodity Supply Chain—It takes a Village

Sustaining Rainforests and Smallholders by Eliminating Payment Delay in a Commodity Supply Chain—It takes a Village

By Joann F. de Zegher, Dan A. Iancu, Erica Plambeck
June 2018Working Paper No. 3684

Millions of poor smallholder farmers produce global commodities, often through illegal deforestation. Multinational commodity buyers have committed to halt illegal deforestation and improve farmers’ livelihoods in their supply chains. We propose a profitable way to do so, motivated by field research in Indonesia’s palm oil industry. Currently, farmers suffer from delay in payment by processors, and buyers expensively attempt to avoid sourcing from illegally-deforested land by monitoring individual farmers. Instead, we propose that buyers reward all farmers in a village by eliminating payment delay if no production occurs on illegally-deforested land in the village. Using field data, dynamic programming and game theory, we show how eliminating payment delay improves productivity and profitability for farmers, processors and buyers, and how village-level incentives best halt illegal deforestation.