Learning Principal-Agent Contracts for Equitable Smallholder Carbon Farming under Moral Hazard and Adverse Selection
cs.LG, cs.GT
Submitted: 2026-09-17
Updated: 2026-09-17
Comments: 14 pages, 2 figures
Code: https://github.com/Rishi-Bharadwaj/carbonfarming-contract-design
License: http://creativecommons.org/licenses/by/4.0/
The gist: Agricultural soils are a major untapped carbon sink.
Terminology
Abstract
Agricultural soils are a major untapped carbon sink. Carbon farming is emerging as a promising practice for tapping this potential. Smallholder farmers, who dominate agriculture across South Asia and sub-Saharan Africa, are key to scaling climate mitigation via carbon farming. It is ironic that real-world carbon programs largely fail to reach them. We study this important gap through the lens of contract design. An aggregator offers a single pooled contract to a heterogeneous population of smallholder farmers who have private adoption costs (adverse selection) and exert unobserved effort (moral hazard), with agronomic outcomes evolving over multiple seasons. We formulate this evolving contracting problem as a POMDP and use reinforcement learning to learn a dynamic profit-maximising contract. We analyse the performance of the aggregator under various conditions. We find that a profit-maximising aggregator does not merely inherit the exclusion of smallholders, it amplifies it. On large farms the aggregator realises 87.7% of achievable adoption, against only 8.2% on smallholdings. Per-hectare Measurement, Reporting and Verification (MRV) costs fall as farm size rises, and the aggregator's pooling contract compounds this gradient rather than offsetting it. A counterfactual that makes MRV costs purely area-proportional eliminates this disparity. Our results and simulation can guide contract and policy design that opens carbon income to smallholders while enabling agricultural soils to contribute to climate mitigation at scale.
Sources
- Principal-Agent Reinforcement Learning: Orchestrating AI Agents with Contracts
- Online Decision-Making in Tree-Like Multi-Agent Games with Transfers
- Proximal Policy Optimization Algorithms
- Multi-Agent Reinforcement Learning for Greenhouse Gas Offset Credit Markets
- Contractual Reinforcement Learning: Pulling Arms with Invisible Hands
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