Here’s a feel-good financial innovation: what if customers could use a mobile app to tip the farmer who produced their food? A new wave of apps, enabled by blockchain, the same technology that enables the cryptocurrency bitcoin, would give socially conscious consumers the chance to boost the wages of smallholder farmers in low-income countries.
But this seemingly positive development might have unintended consequences, according to a new study co-authored by Yale SOM professor Saed Alizamir. The team developed a game-theoretic model to explore how tipping might influence other forces at play among farmers, intermediary agricultural firms, and consumers. The model suggested that, in some situations, tipping could make farmers worse off—for instance, if this feature prompts the agricultural firm to substantially lower the wholesale price for harvests. And even if it achieves its objective of increasing the farmers’ expected wage as intended, not all farmers will benefit equally, which may lead to a perception of unfairness among farmers.
“Does this tipping capability always achieve the intended objective?” Alizamir says. “The answer is no, not necessarily.”
The team did identify a scenario where everyone—farmers, consumers, and intermediaries—benefited from tipping. But achieving this “win-win-win” outcome depends on a complicated set of factors, ranging from how much customers care about fair wages for farmers to how costly it is for the farmers to switch from traditional to sustainable farming.
Given the complexity of the situation, companies should proceed with caution before implementing a tipping option, the team argues. “There might be situations where one or even all of the stakeholders may turn out to be worse off,” Alizamir says.
Just a few years ago, tipping the farmer who grew a particular crop would have been impossible, but it became easier through the emergence of blockchain. This “distributed ledger” technology makes supply chains more transparent by creating secure digital records of every transaction, from the farmer to intermediaries to the retail store. Customers can then scan a QR code on, say, their coffee or cocoa product to trace its origin.
Such transparency has become particularly important for products marketed as sustainable. “That’s where the market is moving,” Alizamir says. The consumers for such products aren’t just concerned about the environment; often, they also want to know that farmers are paid a fair wage.
Tipping could allow socially conscious customers to connect to and support farmers around the world, just as farmers markets and community-supported agriculture (CSA) do locally. When Alizamir first heard that some companies were pursuing this innovation, “it sounded very interesting and very promising,” he says. But he and two colleagues—Foad Iravani, a data scientist at Uber, and Basak Kalkanci of the Georgia Institute of Technology—wondered whether tipping would always benefit all stakeholders—that is, farmers, consumers, and agricultural firms.
At first, “our intuition was, well, this is all good,” he says. “Nobody can be worse off.”
To test the idea rigorously, the team created a game-theoretic model representing the three players. In the model, the intermediary firm set a wholesale price for sustainably grown crops, delivered the food to retail stores, and sold leftover products at a “salvage” price to industrial buyers. Farmers decided to whether to use traditional or sustainable farming practices; if they chose the latter, they could sell their harvests to the intermediary firm. The firm and farmers both tried to maximize their profits.
Consumers in the model had varying levels of concern for farmers’ well-being and a “reference” wholesale price that they considered to be fair pay for farmers. Based on information about the market, they formed a belief about what farmers were actually paid. Customers then had to decide whether to buy a product based on factors such as the retail price, the value they would get out of consuming it, and whether they felt the farmer was paid fairly.
The researchers found that, in some scenarios, tipping benefited all the players; in other situations, everyone was worse off; and sometimes, one party fared better and others worse. These outcomes depended on factors such as how expensive the food was to produce, how socially conscious consumers were, and the gap between the salvage price and retail price.
In the researchers’ model, the presence of tipping sometimes prompted an agricultural firm to lower the wholesale price. From the company’s perspective, Alizamir says, the tipping option “partly offsets my responsibility to pay.”
For instance, the presence of tipping sometimes prompted the agricultural firm to lower the wholesale price. From the company’s perspective, Alizamir says, the tipping option “partly offsets my responsibility to pay.”
In some cases, farmers still benefited; the lower wholesale price plus tips was higher than their previous income. But sometimes, the wholesale price dipped so low that the farmers’ overall income was reduced.
Even when farmers’ average income increased with tips, the system raised questions of fairness. The problem is that “there are lucky farmers, and there are unlucky farmers,” he says. By chance, some crops will be sold to consumers who tend to tip and others to consumers who don’t tend to tip. Farmers in the latter group end up worse off, particularly if they’re also being paid less by the agricultural firm.
“This innovation may create some disparity among farmers,” he says.
The team identified a win-win-win scenario where tipping benefited farmers, the intermediary firm, and consumers. But reaching this outcome required fulfilling a complex set of criteria. It was more likely to occur when the retail price of the product was high compared to its salvage price, the traditional farming alternative was not as lucrative to the farmers, and customers cared a lot about fair wages for the farmers.
Some intermediary firms may commit to paying a fair wholesale price to farmers, regardless of whether they receive tips. But in situations where wholesale pricing might be more fluid, tech companies that are creating tipping apps should consider the consequences, the researchers say. For instance, they might want to pair the app release with a social awareness campaign for consumers. Or the firm could check if each parameter fits the “win-win-win” scenario before proceeding.
The use of blockchain technology to increase supply chain transparency is still a positive development, Alizamir says. Digital records can increase accountability and allow firms to back up claims about a product’s origins. But new blockchain-enabled features such as tipping raise the question, “Should we implement these financial innovations?” he asks. “The answer is sometimes yes, sometimes no.”