Auctioning Conservation Contracts and Evaluating the Risk Attitudes of Farmers: Economic Experiments in Japan

Abstract

Agri-environmental programs in Japan have generally been promoted through the provision of fixed payments for certain environment-friendly farming and management practices. However, the auctioning of agrienvironmental contracts is a noteworthy alternative for the furtherance of such programs. Conservation auctions are used to enhance the cost-effectiveness of public expenses and have been employed in practice as well as tested in various pilot projects in some countries. This study uses an experimental economics method to factor the risk attitude of participants into a comparison of uniform price (UP) auctions and discriminatory price (DP) auctions. Although some studies have compared fixed payments, UP auctions, and DP auctions, the superiority or inferiority of these strategies depends on the settings of an experiment. Consequently, experiments reflecting the Japanese situation could provide further insight into the advantages of each of these methods, and be used to guide policy design. In addition, the study also examines the effects of participants’ risk attitudes on auction performance. Its principal conclusion is that DP auctions outperform UP auctions; this is in line with the findings of previous studies. This empirical research furthers our understanding of environmental auctions in a first step toward the design of such auctions, but field experiments using real farmers should be conducted in order to help corroborate research conclusions before these are applied to the real world.