The Tipping Paradox: Why Sending Extra Cash Directly to Global Farmers Can Backfire

What if tipping the farmer who grew your coffee didn’t actually help them? It sounds counterintuitive, but new research from Saed Alizamir, associate professor of business administration at the University of the Virginia's Darden School of Business, finds that in some circumstances, that’s exactly what can happen.

The finding stems from an emerging financial innovation that uses blockchain technology to let consumers tip the farmers who produced their coffee—a seemingly simple way to ensure more of the money consumers spend reaches growers.

When the average consumer plunks down $20 a pound on a bag of sustainably grown coffee, very little of that premium usually ends up in the hands of small farmers in developing countries, says Alizamir. On that theoretical $20 bag, a farmer might see about $1.20 per pound.

“The problem is that for coffee, like many kinds of agricultural products, the supply chain is very long, and there are a lot of middlemen,” he says. “Most of the profit margin goes to those middlemen, and farmers receive only a tiny fraction of the net profit.”

That’s why the proposal of directly tipping the farmers caught Alizamir’s attention. “The idea is very novel, and proposed with the best of intentions,” says Alizamir, who works in the Data Analytics & Decision Sciences (DADS) area at Darden and has previously studied questions involving agricultural supply chains.

According to a paper forthcoming in the journal Manufacturing & Service Operations Management, by Alizamir and coauthor Basak Kalkanci of Georgia Institute of Technology, the strategy could backfire.

“The question is whether it’s going to have some unintended consequences,” Alizamir says. “At the end of the day, tipping may exacerbate inequity or lead to a reduction in farmers' realized incomes.”

Blockchain technology could create a secure digital record for each transaction in the supply chain, allowing an unbroken line for each individual product to be traced back to the original producer. End customers could then scan a QR code, for example, on an individual bag of coffee to send a secure tip back to the farmer.

Using a game-theoretic model, the researchers analyze the interactions among three distinct market participants: a mass of farmers, an intermediary agricultural firm and a population of socially conscious consumers, all of whom affect each other.  

First, the firm establishes a wholesale price prior to the cultivation season. Next, individual farmers decide whether to produce for the firm or pursue an outside option—such as non-sustainably grown coffee, or a different crop entirely. Finally, each consumer decides whether to buy the product and how much to tip the farmer.

“The farmer can choose to adhere to certain sustainable practices, let’s say producing sustainable specialty coffee, and if they do so, they have the chance to be tipped by the consumer,” Alizamir says.

The model plays out the possible scenarios involved in consumers tipping farmers, determining when such a program is likely to be successful, and when it might fail, or even be counterproductive. They find that such a program could work—but only under certain conditions.

In an ideal world, tipping would lead to a "triple-win," he says, in which the farmers are better off, the firm makes more profit and customers are happier. For that to happen, however, it depends on two interlocking factors: how attractive the outside option is for the farmer, and how socially responsible end consumers are.

Those factors determine both the demand for the product and the supply from farmers, which in turn determine how much the firm is forced to pay.

“The ideal situation is when the farmers’ outside option is not too attractive or unattractive, but moderately attractive, and when the consumers’ social consciousness is sufficiently high,” Alizamir says.

When the outside option is bad for farmers, then the intermediary firm can exploit them by offering a low wholesale price, essentially pocketing tips from consumers as a subsidy. When the outside option is too good, there won’t be enough farmers to meet demand for sustainable growing, making it unprofitable.

A triple-win occurs only when the outside option has a moderate value, providing a financial shield for farmers against greedy wage-cutting while keeping sustainable production profitable, allowing tips to effectively boost farmers’ income and firm profits.

At the same time, a high level of consumer social consciousness guarantees a reliable volume of tips, which stimulates market demand and boosts the firm’s sales, encouraging the firm to maintain its sustainable products and ensuring tips translate into meaningful income gains for farmers.

Even when these conditions are  met, says Alizamir, another potential problem is that tipping may be distributed unevenly among the farmer population, “exacerbating income inequality, creating disparity and exposing them to undesirable income uncertainty.”

One possibility to avoid undesirable outcomes, Alizamir adds, is for the firm to make a commitment to customers to pay a minimum price, ensuring tips will go to the farmers in a way that doesn’t reduce their wages. In practice, however, such a pledge would be difficult to monitor—and it could also hurt the firm, which would then be unable to adjust its price to take into account market conditions.

In addition to agricultural producers, the findings of this research could be applied in other industries—for example, producers of artisan handicrafts, including carpets or Christmas ornaments. Outside of the context of developing countries, it might also be applied online to digital content creators, allowing customers using those services to directly tip creators of graphics or other content.

For companies interested in implementing such a program, Alizamir suggests they first assess the market, including both demand and supply sides to ensure the feasibility of a tipping program.

“At the end of the day, it’s a balance between supply of producers and demand from customers, looking at how sensitive the end consumers are, how that’s going to impact the behavior of the suppliers, and how it’s going to impact the firm’s bottom line,” he says.

At the very least, he adds, more education is needed for consumers to make them aware of this possibility and get them to buy into the idea and trust it will be implemented fairly. In that case, demand from consumers could increase the desirability for producers, as well as profits for firms—providing a technological solution to ensure that more of the money consumers pay goes directly to those who are actually creating the goods.

Professor Saed Alizamir is co-author of “Tip Your Farmer? Implications of Tipping on Smallholder Welfare in Agricultural Supply Chains,” with Basak Kalkanci of Georgia Institute of Technology, forthcoming in Manufacturing & Service Operations Management (M&SOM).