IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Does Government’s Biofuel Incentive Payment Program Work in the Presence of Asymmetric Information?

Listed author(s):
  • Maung, Thein A.
  • Yuan, Yan
Registered author(s):

Since combustion of fossil fuels can release a large amount of greenhouse gases into the atmosphere thereby accelerate the rate of climate change, biofuel from biomass has been suggested as a fuel of the future. We argue that if biofuel is to become a fuel of the future, the principal (government or social planner) should make monetary incentive payments to farmers willing to dedicate their farm land to growing bioenergy crops. The problem arises when the principal does not have information on whether these biofuel farmers are actually low-cost types or high-cost types. The idea of a biofuel incentive payment program is to distribute more incentive payments to high-cost farmers so as to induce them to participate in the program. Principal-agent model is used to study the effect of hidden information on the government’s incentive payments to biofuel farmers. Results show that with complete information both low-cost and high-cost type farmers have incentives to produce biofuel crops under the government contract. When information asymmetry is considered, low-cost farmers earn extra payments, but their optimal productivity level remains unchanged. In this second-best outcome with asymmetric information, high-cost farmers’ optimal level of productivity and incentive payments that they received depend on the marginal costs of raising tax revenue. Generally, our results suggest that the government’s biofuel incentive payment program may not be an effective tool in inducing biofuel crop production if asymmetric information is present and marginal costs of raising tax revenue are high.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Agricultural and Applied Economics Association in its series 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado with number 61816.

in new window

Date of creation: 2010
Handle: RePEc:ags:aaea10:61816
Contact details of provider: Postal:
555 East Wells Street, Suite 1100, Milwaukee, Wisconsin 53202

Phone: (414) 918-3190
Fax: (414) 276-3349
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ags:aaea10:61816. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.