Auction design for voluntary conservation programs

This article summarizes results from two labor, oratory experiments that investigate altenative auction mechanisms that are useful for conservation and natural resource management. The first experiment examines the relationship between an auction's information structure and landowners' incentives to reveal their costs, with the goal of identifying information conditions that allow the regulator to award land management contracts to maximize the pollution abated for a fixed auction budget. The experiment manipulates the amount of information available to landowner sellers as the primary treatment variable. In one treatment the auctioneer does not reveal to sellers the environmental benefit of their proposed land use changes. In the other treatment sellers learn their projects' environmental benefits before submitting offers. Revealing information about environmental benefits could lead to an increase in the perceived fairness and transparency of the auction, and it could also educate landowners about the most beneficial land use changes and encourage investment in conservation. We find, however, that revealing this information reduces the auction's overall performance because sellers' offers misrepresent their costs more for high benefit projects. The results from this experiment were employed in a biodiversity preservation auction in Australia. The second experiment focuses on the pricing rule for conservation and land management auctions. It compares discriminative price auctions with uniform price auctions to determine whether the pricing rule has an impact on the landowners' profits and on the environmental benefits acquired for a given, fixed auction budget. In the uniform price auctions the successful sellers receive a price determined by a rejected seller's price offer, which substantially increases the incentive to reveal costs compared to the discriminative price auction. But due to the heterogeneity of landowners' cost some landowners are "overpaid" in the uniform price auction because they receive payments from the regulator that substantially exceed their opportunity cost. Consequently, we find that the discriminative price auction has superior overall market performance. The two experiments are described in greater detail in Cason, Gangadharan, and Duke and Cason and Gangadharan, respectively.