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Contracts Between Small Scale Soybean Farmers and the Biodiesel Industry in Brazil: An Application of Principal-Agent Model

Author

Listed:
  • Clemente, Felippe
  • da Silva Júnior, Aziz Galvão

Abstract

A contract is considered incomplete when the optimal solution for a contractual problem requires some information from the parts which is not observable by one or both parts. This problem is found in the biodiesel production chain among small scale farmers and biodiesel companies in Brazil, which is regulated by a certification called Social Fuel Seal under the framework of the PNPB (Brazilian Program for Production and Use of Biodiesel). In order to minimize this hindrance, an incentive structure was elaborated utilizing the nonlinear programming. The Principal-Agent approach was used to verify if these new incentives allow for the small scale soybean farmer to put great effort level in the agricultural production. When the incentive structure is evaluated through the model proposed, the result indicates that both the farmer and the biodiesel company will have their profits maximized if the producer puts on great effort. Thus, it is clear the importance to include this mechanism of stimulation to productivity increase into the PNPB framework in order to contribute to the competitiveness of the Biodiesel chain in Brazil.

Suggested Citation

  • Clemente, Felippe & da Silva Júnior, Aziz Galvão, 2013. "Contracts Between Small Scale Soybean Farmers and the Biodiesel Industry in Brazil: An Application of Principal-Agent Model," 2013 International European Forum, February 18-22, 2013, Innsbruck-Igls, Austria 164767, International European Forum on System Dynamics and Innovation in Food Networks.
    • Handle: RePEc:ags:iefi13:164767
    DOI: 10.22004/ag.econ.164767
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    References listed on IDEAS

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    1. da Silva Junior, Aziz Galvao & Vianna Leite, Marco Antonio & Clemente, Felippe & Perez, Ronaldo, 2012. "Contract Farming: Inclusion of Small Scale Farmers in the Brazilian Biodiesel Production Chain," 2012 International European Forum, February 13-17, 2012, Innsbruck-Igls, Austria 144970, International European Forum on System Dynamics and Innovation in Food Networks.
    2. Robert Gibbons, 1998. "Incentives in Organizations," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 115-132, Fall.
    3. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
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    1. Chamberlain, W.O. & Anseeuw, W., 2017. "Contract Farming as Part of a Multi-Instrument Inclusive Business Structure: A Theoretical Analysis," Agrekon, Agricultural Economics Association of South Africa (AEASA), vol. 56(2), March.
    2. Felippe Clemente, 2021. "Analysis of the Brazilian tax incentives to innovation and patent data: a Principal-Agent model approach," Revista Finanzas y Politica Economica, Universidad Católica de Colombia, vol. 13(2), pages 403-437.

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