<p>This study examines the impact of contract farming on the income of smallholder oyster farmers in coastal Shandong Province, China, addressing the mixed findings in existing literature on its effectiveness in developing countries. Using survey data from 510 oyster farming households across four coastal cities, the study applies a combined coarsened exact matching (CEM) and propensity score matching (PSM) approach to mitigate selection bias. Treatment effects are estimated via weighted least squares (WLS) regression, and a mediation model explores the role of new equipment adoption and technology upgrades as pathways linking contract participation to income improvement. Results show that participation in contract farming significantly increases both total farm income and farm income per output. A dual mediation effect is confirmed: Contract farming facilitates the adoption of new equipment, which in turn drives technological upgrading, ultimately enhancing income. However, new equipment alone can temporarily reduce income due to high initial costs. Regional heterogeneity analysis reveals that income effects with high levels of regional policy support. This study contributes to the literature by providing new empirical evidence from an under-researched sector—oyster aquaculture—and by introducing a sequential mediation model that uncovers the mechanisms behind income changes.</p>