Contracting with asymmetric information under government subsidy programmes in a bioenergy supply chain

Abstract

This paper investigates the government subsidy programmes for a bioenergy supply chain composed of a power plant and farmers who privately know their quality information of bioenergy. The government offers two types of subsidy programmes to increase the supply of bioenergy: Agriculture Quantity Coverage (AQC) programme that pays the farmers subsidies based on the quantity of bioenergy, and Price Loss Coverage (PLC) programme that is triggered when the market price of bioenergy falls below a reference price. With AQC programme, when the quantity of bioenergy is large, farmers may get more subsidies but the wholesale price of bioenergy would decrease, thus hurting the farmers' payoffs. By contrast, with PLC programme, the farmers can get more subsidies with a lower wholesale price, which also undermines the farmers' profitability. In equilibrium, the government prefers the AQC programme when the cost of the non-bioenergy is high, or the cost of the non-bioenergy is low and the government's subsidy payment coefficient in the PLC programme is high. Moreover, social welfare is higher with the PLC programme than that with the AQC programme when the cost of the non-bioenergy is high and the subsidy payment coefficient is low, and is lower otherwise.