Conservation Auctions Research Articles

Landscape‐level determinants of the performance of an agglomeration bonus in conservation auctions

AbstractThe agglomeration bonus (AB) has been advocated as an incentive mechanism to boost spatially coordinated conservation efforts, where such coordination is thought to be beneficial to achieving biodiversity or other ecological outcomes. Specifically, an AB is paid to individual landholders if their conserved habitats are spatially connected to the conserved habitats of adjacent neighbours. This paper employs a series of controlled lab experiments with agriculture students to investigate the performance of AB in budget‐constrained discriminatory‐price auctions across different landscape types. We focus on the spatial correlation of opportunity costs and environmental benefits as one potentially important aspect of the landscape. We set up a stylised agricultural landscape where the conservation agency aims to connect fragmented wildlife habitats by incentivising farmers to enrol land in a conservation programme. We investigate the effects of an AB in landscapes where opportunity costs and environmental benefits are uncorrelated, negatively correlated or positively correlated over space. We found that the benefits of an AB in improving landscape‐scale environmental outcomes were significant in the positive correlation landscape. However, the AB resulted in worse outcomes in the uncorrelated and negative landscapes.

Spatially coordinated conservation auctions: A framed field experiment focusing on farmland wildlife conservation in China

AbstractHow best to incentivize land managers to achieve conservation goals in an economically and ecologically effective manner is a key policy question that has gained increased relevance from the setting of ambitious new global targets for biodiversity conservation. Conservation (reverse) auctions are a policy tool for improving the environmental performance of agriculture, which has become well‐established in the academic literature and in policy making in the US and Australia. However, little is known about the likely response of farmers to incentives within such an auction to (1) increase spatial connectivity and (2) encourage collective participation. This paper presents the first framed field experiment with farmers as participants that examines the effects of two features of conservation policy design: joint (collective) participation by farmers and the incentivization of spatial connectivity. The experiment employs farmers in China, a country making increasing use of payments for ecosystem services to achieve a range of environmental objectives. We investigate whether auction performance—both economic and ecological—can be improved by the introduction of agglomeration bonus and joint bidding bonus mechanisms. Our empirical results suggest that, compared to a baseline spatially coordinated conservation auction, the performance of an auction with an agglomeration bonus, a joint bidding bonus, or both, is inferior on two key metrics—the environmental benefits generated and cost effectiveness realized.

Rent seeking and precautionary bidding in conservation auctions

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.

Informational nudges in conservation auctions: A field experiment with U.S. farmers

In the U.S., the fifth largest “crop” is vegetation dedicated to environmental conservation. Over 22 million acres of perennial covers are planted on environmentally sensitive land enrolled in U.S. Department of Agriculture’s Conservation Reserve Program (CRP), one of the largest agricultural conservation programs in the world. About half of CRP lands are enrolled through a complex reverse auction called the General Signup. The communication of program options to participants could have an important behavioral impact. Psychologists have found that information presentation in complex decision environments can interact with the bounded rationality and cognitive biases of decision makers. We tested two changes in the status quo CRP decision environment using an incentivized, lab-in-the-field experiment with 701 prior General Signup participants. First, program participants typically make an active choice over which cover practice to plant and how much of a discount to offer, where the discount is a reduction in their annual program payment. Changing that default to an opt-out, high-scoring offer resulted in a 13 percentage point increase in selection of the best practice and a 48 percent increase in the average discount. In the actual CRP, that increase in discounting would reduce total program costs by about $30 million per signup. Second, shifting to real-time updating of offer scores modestly reduced the frequency with which participants revised their offers, suggesting a reduction in transaction costs. From a policy perspective, these results suggest that small changes in conservation auctions could both improve the quality of conservation practices and reduce program costs.

Algorithm of Ecocompensation in Sloping Land Conversion Program Based on Heckman’s Two-Step Model

In this paper, we broadly generalize the assignment auction algorithm to solve linear minimum cost network flow problems. It is significant to establish a market-based compensation mechanism by way of conservation auctions based on peasant households’ willingness, which can promote the innovation of ecocompensation policies, green development, and balanced growth. Using the survey data collected from 453 households within 3 national pilot counties in ecologically fragile regions in northwest Liaoning for the Sloping Land Conversion Programme, measuring peasant households’ willingness to accept ecocompensation through sealed auctions, we built a database through cloud computing to realize information collation and query and applied the Heckman’s Two-Step Model to study the impact of risk preference, social capital, cognitive preference, land parcel characteristics, and family endowments on farmers’ willingness to participate in protection auctions and their bid prices. The results reveal that the average bid price of peasant households in the ecologically fragile region in northwest Liaoning for the Sloping Land Conversion Programme is annually 274.5 yuan per mu and that risk preference and social capital have positive impacts on peasant households’ willingness to participate in conservation auctions and on their bid prices, cognitive preference has a positive impact on peasant households’ bid prices in conservation auctions, and land plot characteristics have a negative impact on peasant households’ bid prices in conservation auctions. It is suggested that ecocompensation policies should be optimized with such methods as lowering peasant households’ perception of high risks, setting role models for them to follow, and strengthening their perception of the environment, income, and property rights.

The influence of contract length on the performance of sequential conservation auctions

AbstractThe present article explores the extent to which the performance of a sequential conservation auction can be improved by changing the duration of conservation contracts. Optimal bidding in the context of a sequential conservation auction is modeled as a dynamic optimization problem and solved through backward induction. We show that a longer duration of conservation contracts increases not only the privately optimal bid of a risk‐neutral bidder but also the probability that a land plot is included in a conservation program. Whether a longer duration of conservation contracts increases or decreases the budgetary cost effectiveness and economic efficiency of a sequential auction depends on the scale of variation for the cutoff bid.

Spatial Coordination and Joint Bidding in Conservation Auctions

Spatial coordination of land use change is pivotal in agri-environmental policy to improve the delivery of environmental goods. This paper implements a laboratory experiment to study spatial coordination in a conservation auction. In addition to letting individual producers bid competitively against each other to supply environmental goods, we ask whether opportunities for joint bidding can enhance spatial coordination in the auction cost-effectively. Auction performance depends on the nature of incentives for individual bids; in particular, whether an agglomeration bonus is offered for individual bids. With an individual bonus in place, joint bidding gives no improvement in either environmental benefits procured or cost-effectiveness. Absent an individual bonus, joint bidding improves environmental performance but can decrease cost-effectiveness. Further, across both individual and joint bidding treatments, the average environmental benefits, degree of spatial coordination, and cost-effectiveness are greater, and amount of seller markups lower, with multiple-round bidding compared to single-round bidding.

Balancing Cost Effectiveness and Incentive Properties in Conservation Auctions: Experimental Evidence from Three Multi-award Reverse Auction Mechanisms

Government agencies are increasingly using economic incentives to encourage landowners to adopt conservation practices. Auctions enable agencies to identify land conservation practices with low opportunity costs. At the same time, landowners’ opportunity costs contain useful information for government agencies to rank conservation priorities. This paper introduces a new reverse auction mechanism that performs well both from the cost effectiveness and cost-revelation perspectives and compares three multi-award reverse auction mechanisms. The first mechanism is called the Uniform Price Reverse (UPR) auction, where each winning bidder is paid the lowest rejected bid. The second mechanism is called the First Price Reverse (FPR) auction, where winning bidders are paid their submitted bids. The third, novel, mechanism is called the Generalized Second Price Reverse (GSPR) auction, where each winning bidder is paid the bid that is immediately higher. Theoretically, I derive the equilibrium bidding strategy for each auction mechanism and show that a symmetric equilibrium strategy may not exist under the GSPR auction. Empirically, lab experiment results show that UPR and GSPR auctions lead to a higher efficiency level compared to FPR, while UPR auction yields the lowest auctioneer surplus and is the least cost effective. As a result, GSPR maintains good incentive properties similar to UPR and presents potential large cost-saving opportunities to the auctioneer.

The cost-effectiveness of conservation auctions in the presence of asset specificity: An agent-based model

Payments for Environmental Services are a financial incentive for land users to conserve and restore ecosystems. One of the challenges in their implementation is to maximize their cost-effectiveness, or put in other words, to maximize the provision of environmental services for a given budget. This study focuses on two aspects that endanger the cost-effectiveness of such schemes: asymmetric information and asset specificity. If land users are better informed about their own provision costs, compared to the agency, they can increase their rents by demanding higher payments. The presence of asset specificity makes land users vulnerable to being harmed by opportunism. To compensate this risk, they could require higher payments or an exante compensation, likely to compromise compliance. Auctions are claimed to reduce informational rents by revealing land users’ true provision costs. However, their costeffectiveness has been shown to deteriorate if they are repeated over time because bidders can learn and adapt their strategies. Social interaction is particularly important in this context, as it allows land users to gather information on the bid cap; and it allows for trust building, which can substitute the costly formulation and enforcement of contracts, and thus reduce contracting costs. So far, there are only few studies analyzing the effect of asset specificity on the cost-effectiveness of auctions. Our study fills this gap using an agent-based model to analyze the cost-effectiveness of uniform and discriminatory one-shot and repeated auctions. In our model, land users are assumed to be embedded in a social network through which they can interact and learn. Our results suggest that repeated auctions can increase the cost-effectiveness of payments schemes in the presence of asset specificity despite of learning effects over time if land users face liquidity constraints and high time preferences.

Designing cost-efficient payments for forest-based carbon sequestration: An auction-based modeling approach

Conservation auctions can reveal information about the opportunity costs of afforestation, which can be combined with the carbon sequestration benefits of land-use changes to design cost-efficient payment systems. Furthermore, the impact of integrating cost-benefit information to ensure efficiency gains or to ensure minimal efficiency losses in multi-round conservation auctions, where landowners learn to extract information rents, depends on the level of correlation between costs and benefits. Incorporating discriminatory-price auction theory, and an agent-based model, simulated data are used to examine the cost-efficiency of cost-ranked and cost-benefit-ranked auction-based payment designs for forest-based carbon storage for alternative levels of correlation between afforestation opportunity costs and carbon sequestration capacities in static and dynamic settings. Results show that the cost-benefit-ranked design is more cost-efficient than the cost-ranked design in a static setting even though the relative spatial heterogeneities of costs and benefits are identical. More importantly, the cost-efficiency of the cost-benefit-ranked design is generally robust to deterioration as bidders learn over repeated auction rounds, compared with the cost-ranked design, and more resistant to deterioration for some levels of correlation.

Performance of Agglomeration Bonuses in Conservation Auctions: Lessons from a Framed Field Experiment

The incorporation of an agglomeration bonus payment to encourage spatial coordination in auction mechanisms to allocate payments for ecosystem services (PES) contracts has been explored as a promising innovation that could enhance the effectiveness of PES schemes. Empirical evidence on the performance of this particular design feature is scant, and almost exclusively derived from laboratory experiments using student subjects. This study reports results from a framed field experimental auction allocating PES contracts with and without agglomeration bonus payments using actual forest land owners in rural China as subjects. We find tentative evidence that, in a PES auction that provides agglomeration bonuses, subjects tend to bid less in anticipation of receiving bonus payments when their neighbours are also successful in the auction. In addition, we have mixed findings as to whether the agglomeration bonus is able to induce a bidding pattern in favour of contiguous conservation. The two sets of results convey some encouraging signals of the theoretically postulated cost-effectiveness and conservation efficacy of the agglomeration bonus. Further research from the actual field is warranted in light of the policy significance of this innovative incentive mechanism.

Gender aspects in action- and outcome-based payments for ecosystem services—A tree planting field trial in Kenya

Payments for ecosystem services (PES) schemes have been increasingly implemented in developing countries where gender-related inequalities are generally prevalent. A randomized field trial in Kenya revealed the impacts of participants’ gender in conservation auctions and in environmental performance of action- and outcome-based PES schemes and provided evidence for associations between the gender effects and traditional gender roles. First, we identified differences between men and women in the utilities of the contract and relative risk aversion as potential drivers of the decrease in bids by women compared to men in the auction for action-based contracts. Second, we observed a gender-specific difference in perceptions of risk in the outcome-based approach when women increased their bids. Third, women achieved lower tree survival than men, despite women providing more effort. In this context, we identified the inequality in reciprocal labor for male and female contract holders as a possible source of the gendered tree survival. This case study showed that targeting women improves gender equity in terms of access to project decision-making, trainings and cash, and can significantly improve the effectiveness of the PES scheme.

Conservation Auctions, Collusion and the Endowment Effect

We contribute to the literature on the optimal design of auction mechanisms for the procurement of nature conservation activities. We use an economic experiment to examine whether the market efficiency of conservation auctions increases or decreases with repetition. Theory predicts that repetition facilitates collusion among sellers in procurement auctions, while behavioral economics suggests that repetition may increase market efficiency because it attenuates the endowment effect - the phenomenon that ownership of a good tends to increase one's valuation of the good. We find that of these two countervailing effects, the latter has the upper hand; average bids decrease monotonically over the consecutive auctions. Since repetition increases market efficiency, conservation contracts can be of shorter duration and procured at a higher frequency than has been suggested before.

How well do conservation auctions perform in achieving landscape-level outcomes? A comparison of auction formats and bid selection criteria

This paper studies the performance of auction design features regarding pricing mechanisms and bid selection criteria for securing wildlife zones across different holdings. We compare two pricing mechanisms: a discriminatory-price auction and a uniform-price ascending auction, and four bid selection criteria on the basis of: total bid, bid-per-value ratio, bid-per-area ratio and a mixed criterion where bids are formed on the basis of cost but they are selected based on the bid-per-value ratio. We develop a best-response group-bidding model for a discriminatory-price auction where bidders form optimal group bids for individual wildlife zones. In the uniform-price ascending auction, individual landholders respond to prices, which are successively raised by the auctioneer and whenever all the landholders from a single zone agree to participate (i.e. the first zone is formed), the auction stops. Based on numerical simulations using a bio-economic model of malleefowl conservation, we observe that the discriminatory-price auction is more cost-effective than the uniform-price ascending auction. However, the budgetary cost-effectiveness of a discriminatory-price auction is sensitive to bidder uncertainty about the number of competing bidder groups and the highest cost of establishing a wildlife zone among these groups. In terms of bid selection, the mixed bid selection criterion performs best. We discuss the policy implications of these findings.

An overview of laboratory research on conservation auctions

This paper reviews the laboratory research on conservation auctions by first suggesting a framework for organizing the literature; then by highlighting the key insights and contributions achieved to date; and thirdly by taking stock of pending questions and unresolved problems. The review framework focuses on the performance of conservation auctions and distinguishes between causal factors and resulting effects. Causal factors include auction format, implementation rules and bidder characteristics, as well as some other aspects. Resulting effects distinguish between intermediate effects, mainly in terms of bidder behaviour, and final auction performance. Rather than a standard literature review, this ‘overview’ also tries to capture the work that is currently going on and that has not yet been published.

An experimental examination of target based conservation auctions

Conservation auctions are increasingly employed to increase the provision of Ecological Goods and Services (EG&S) for achieving environmental goals. Most applications of conservation auctions concern the efficient allocation of a fixed conservation budget. However an important and under-explored application of conservation auctions is in meeting environmental targets, either as part of regulatory compliance by industry or by governments in meeting specified policy objectives. This paper examines the ability of a conservation auction to meet an environmental target. We use experimental economics methods benchmarked to a wetlands restoration case study to examine bidder behavior and efficiency in both budget constrained and target constrained auctions when landowners with increasing marginal costs can offer increasing sized bundles of wetland acres. The target constrained auction is characterized by an all or nothing rule, where there is no payout if the target is not met. We find that rent seeking and average cost in the target constrained auction is less than in a budget constrained auction, but that efficiency eroded in repeated rounds suggesting learning effects as participants realize there is no budget cap. Even with learning effects the target based auction out-performs the budget based auction. Adding a reserve price to the target based auction significantly reduced rent seeking but also increased the probability that the target was not met. The results have important implications for auction design in real world settings.

Auction winning, social dynamics and non-compliance in a payment for ecosystem services scheme in Indonesia

Conservation auctions for payment for ecosystem services (PES) are useful to identify the levels of incentives that will cover the opportunity costs of farmers supplying ecosystem services. Although auctions are increasingly used for allocation in PES schemes, the factors that lead to their successful implementation and eventual environmental outcomes are poorly understood in developing countries. We investigated the socio-economic and institutional contexts that led to smallholders' auction winning and eventual compliance using linear mixed-effects models, and post-auction and post-contract surveys. We employed a case study of a conservation contract preceded by a sealed-bid, multiple round, uniform price auction for watershed services from coffee farmers in Lampung, Indonesia. The auction participants presented low education levels, low asset endowments and small plot sizes. The study obtained evidence that farmers with larger plot areas were more likely to win the contracts, suggesting economies of scale. Most farmers considered the auction a fair self-selection mechanism to allocate contracts where allocation was not influenced by power or social rank. Non-compliance was associated with labor availability constraints, short duration of land ownership and existence of previous conservation applications, suggesting lax of capability to invest in applying conservation agriculture. Final bids were however not good predictors of compliance, among other factors, calling into question the potential of auctions to elicit the actual incentive from the farmers. Ensuring that farmers understand the purposes of auctions for effective contract allocation beyond a mere game and identifying farmers that might encounter difficulties fulfilling the contract could increase the likelihood that such a PES scheme would be successful.

How auctions to allocate payments for ecosystem services contracts impact social equity

Conservation auctions are used in Payments for Ecosystem Services (PES) scheme implementation as they are an efficient way to identify participants. Ensuring a fair implementation process is important when considering an equitable PES scheme. Currently the implications, such as impacts on social dynamics and participant perceptions, of auctions at both the individual and community level are poorly understood. Using a case study a long-standing and well-established PES scheme in Sumberjaya, Indonesia, we aim to explore the relationship between farmer characteristics and their perceived auction fairness/satisfaction and impacts on the community social dynamics. We find that a fair auction process allowing all to participate leads to perceived fairness at the individual level. However, at the community level, we find that individuals perceive more social impacts. Our results also find that information quality is the main factor in increasing fairness and reducing community impacts. Our results suggest that while it is possible to have an equitable implementation process, ensuring procedural equity may potentially compromise contextual equity. These results can aid in the implementation of PES schemes and shed some light into which characteristics to identify within potential participants and communities to avoid social disruptions.

Quality Information and Procurement Auction Outcomes: Evidence from a Payment for Ecosystem Services Laboratory Experiment

AbstractProcuring agencies in conservation auctions typically have more information about the ecosystem service (ES) quality of conservation actions than landowners and can affect auction outcomes by controlling participants’ access to this information. Our induced‐value laboratory auction experiment explores the impact of sellers’ access to ES‐quality information on auction efficiency when the conservation action choice is endogenous to offer formation. We find that providing ES‐quality information allows sellers to identify and submit higher‐quality conservation actions, an effect that counteracts previously identified efficiency losses from information rents.

Mechanisms and impulses influencing development of agriculture and rural areas (3)

The monograph aims at presenting following issues: 1. Analysis of changes in the financial support system for rural development and agriculture from EU funds for 2014-2020. 2. Assessment of the possibility of using auctions as a tool for internalizing externalities and providing public goods in agriculture. 3. Estimation of the level of fiscal multipliers in agriculture. Chapters: Analysis of changes in the financial support system for rural and agriculture development for 2014-2020 using EU funds. Conservation auctions as a tool for internalizing externalities and supplying public goods by agriculture. Fiscal multipliers in agriculture.