Contract theory and implications for perennial energy crop contracting

Abstract

This article provides an overview of modern contract theory and discusses the implications of the theory for contracting for perennial dedicated energy crops. We discuss some of the unique challenges of contracting for dedicated energy crops used for the production of advanced biofuels and survey some of the relevant concepts and research from the contract theory literature to address these challenges. We focus primarily on the “mechanism design” or “complete contracts” approach to contracting, which involves optimizing some objective function (e.g. profits, costs, etc.) with respect to contract terms, subject to important incentive constraints. The solution to these optimization problems typically highlight important tradeoffs that a contract designer needs to consider in order to maximize profits and/or minimize costs.