How Policy Affects Incentives and Contract Duration in Biomass Production

Policies such as Biomass Crop Assistance Program (BCAP) which aim to assist farmers with biomass production may act as a double-edged sword. On one hand, they lure farmers to adopt biomass production in the short term. On the other hand, they can’t be irresponsible for farmers’ abandonment of biomass production in the long run. The paper sharpens this idea in a principal-agent setting and argues that by offering a timely loyalty premium the agents’ take-and-run behavior can be mitigated. Moreover, the model shows that effort and investment in human capital are increasing in loyalty premium when agents decide to continue providing biomass after testing-water contract expires.