The Random Quantity Mechanism: Laboratory and Field Tests of a Novel Cost-Revealing Procurement Mechanism

Abstract

Information on private costs can improve the efficiency of programs that provide payment for environmental services in contexts involving information asymmetries and heterogeneous private costs. Using data from laboratory and field experiments, this paper presents and evaluates a novel private cost revealing mechanism, termed the random quantity mechanism (RQM), that can advance research in conservation contracting, payments for environmental services, and other similar settings. We examine the RQM’s performance in a laboratory setting using induced costs and report results obtained from the first field implementation of this mechanism, with smallholder farmers in Zambia. We show that the RQM is incentive-compatible, that participant decision-making maximizes expected payoffs, and that the mechanism provides non-parametric estimates of private costs. The paper contributes to economic field studies by introducing a new incentive-compatible mechanism that elicits individuals’ minimum willingness to accept across intensive margins, enabling researchers to estimate the supply of a service or commodity, and provides for exogenous variation in contract terms, which can aid in separately identifying the impacts of incentives and of participants’ willingness to accept on contract outcomes.