Rent seeking and precautionary bidding in conservation auctions

Abstract

AbstractThe paper presents a model to study reverse auctions for conservation contracts. A buyer elicits bids from multiple rent seeking and risk averse farmers. Conservation activities have ex post cost risk such that farmers only learn the true value of conservation contracts after the auction. The paper derives the optimal bidding function and shows that farmers have conflicting incentives when facing multiple sources of risk. Specifically, we show that farmers exhibit a form of precautionary bidding, that is, they increase their bids in response to an increase in valuation risk. We propose an approach to take the model to the data and recover structural risk parameters. The suitability of the approach to real‐world data is demonstrated through a Monte Carlo experiment.