IDEAS home Printed from https://ideas.repec.org/p/ags/aaea10/61816.html
   My bibliography  Save this paper

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

Author

Listed:
  • Maung, Thein A.
  • Yuan, Yan

Abstract

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.

Suggested Citation

  • Maung, Thein A. & Yuan, Yan, 2010. "Does Government’s Biofuel Incentive Payment Program Work in the Presence of Asymmetric Information?," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61816, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea10:61816
    as

    Download full text from publisher

    File URL: http://purl.umn.edu/61816
    Download Restriction: no

    More about this item

    Keywords

    Resource /Energy Economics and Policy;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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). General contact details of provider: http://edirc.repec.org/data/aaeaaea.html .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.