Small farmers in emerging economies face numerous constraints, including financial distress and limited access to profitable markets. Thus, procurement contracts having provisions for resource inputs are essential in linking them to the mainstream agri-supply chains. Consequently, we frame contracting decision-making models for risk-neutral firms sourcing from credit-constrained smallholders. Behaviorally, the farmers are decision-biased and have subjective perceptions of crop yield based on the contracting terms. Firstly, we design an advance payment contract that pays a fraction of the per-unit guaranteed price for the committed supply quantity to the farmers as advance. Secondly, our model determines the optimal timing for paying the advances to the eligible farmers using two different strategies. While the first aims to maximize the firms' profit, the second strategy favors the farmer without adversely affecting the contractor. Thirdly, given the information asymmetry on farmers' cost and behavioral attributes, we design a menu of contracts based on the contract theory. The menu simultaneously aims to maximize the firm's expected profit while meeting the welfare needs of the smallholders having the highest requirement for an advance. Finally, we use existing data on the model’s parameters value to numerically illustrate its applicability. The illustration could demonstrate the customarily observed practice of excluding smallholders from contractual arrangements featuring no-advance payment contracts. It also exhibited a menu’s dominance over a single contract in meeting the supply chain entities’ mutual needs and its usability in promoting socially responsible operations. We believe that firms and policy-makers would find these analyses helpful in designing socio-economically viable agri-supply chain contracts.

Keywords: OR in agriculture; Menu of contracts; Advance payments; Decision-biased newsvendor; Socially responsible operations