Government penalty provision and contracting with asymmetric quality information in a bioenergy supply chain

Abstract

Bioenergy, which is viewed as a renewable and clean energy, has been receiving great attention in recent years. To protect the environment and raise the share of bioenergy, the government usually offers penalties to the power plant if the ratio of bioenergy in electricity is below a certain target level. This paper studies the government’s penalty provision in a bioenergy supply chain consisting of a power plant and farmers who privately know their quality information of the bioenergy. We consider two scenarios, i.e., symmetric information and asymmetric information, under which the power plant can offer a single wholesale price contract or a menu of quantity-payment contracts. We conduct some game-theoretical analysis and obtain the optimal decision of the government and the optimal contracts for the power plant under different scenarios. Some non-trivial results are obtained. When the target level is low, the social welfare is higher with symmetric information than that with asymmetric information. However, when the target level is high, the social welfare is hurt by the improvement of information transparency. Moreover, the government will set a higher target level under the wholesale price contract than that under the menu of quantity-bundle contracts. The profit for the power plant is higher with the menu of quantity-bundle contracts than that with the wholesale price contract. We also find that when the target level is either low or high, the farmers should make the bioenergy quality information transparent to maximize their own expected payoffs. However, when the target level is medium, the farmers should withhold the relevant information.