Auctioning Risky Conservation Contracts

Conservation auctions have the potential to increase the efficiency of payments to farmers to adopt conservation-friendly management practices by fostering competition among them. The literature considers bidders that have complete information about the costs of adoption and optimal bidding behavior...

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Bibliographic Details
Published in:Environmental & resource economics 2017-12, Vol.68 (4), p.1111-1144
Main Authors: Wichmann, Bruno, Boxall, Peter, Wilson, Scott, Pergery, Orsolya
Format: Article
Language:English
Subjects:
Auctioning
Auctions
Aversion
Bidding
Bids
Conservation
Conservation practices
Economic models
Economic Policy
Economics
Economics and Finance
Environmental Economics
Environmental Law/Policy/Ecojustice
Environmental Management
Farmers
Losing
Payments
Rents
Risk
Risk aversion
Risk behavior
Risk taking
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Summary:Conservation auctions have the potential to increase the efficiency of payments to farmers to adopt conservation-friendly management practices by fostering competition among them. The literature considers bidders that have complete information about the costs of adoption and optimal bidding behavior reflects this information advantage. Farmers seek information rents and bids decrease when risk aversion increases because farmers are more averse to losing the auction. We contribute to the literature by allowing for cost risk. Our paper shows that farmers must balance the risk of losing the auction (thus foregoing information rent) with the risk of submitting a bid that is not high enough to pay the costs of adopting conservation practices (thus incurring losses). We design an experiment to trade off these two risks and examine how risk aversion affects bidding behavior when participants face different sources and levels of risk. Our experiment contributes to a small literature on experimental auctions with risky product valuations. We find that participants decrease their bids as risk aversion increases, even in auctions with cost risk, suggesting that the risk of losing the auction dominates. These findings uncover new challenges for the practical implementation of conservation auctions as an efficient policy instrument.
ISSN:0924-6460
1573-1502
DOI:10.1007/s10640-016-0063-x