Vertical Integration or Contract Farming on Biofuel Feedstock Production: A Technology Innovation Perspective
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Both the goal of energy independence and the desire to lower greenhouse gas
emission have triggered the search for alternate energy sources. For second generation biofuel
production, a key question is which form of industrial organization should be adopted in order
to stimulate stable feedstock production. Using a two-stage optimal control framework, we
analyze the optimal form of industrial organization should be adopted where technology
innovation is endogenous and biorefinery faces credit constraint. Our results show that,
under certain assumptions, it is optimal to adopt vertical integration in the beginning and
move to contract farming later. Moreover, the tighter credit constraint that a biorefinery
faces, the sooner the biorefinery would adopt contract farming.