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Auctions for Conservation Contracts: A Review of the Theoretical and Empirical Literature (Project No: UKL/001/05)

DescriptionThis report aims to provide SEERAD with a comprehensive review of the literature on conservation contract design and the use of auctions in agri-environmental policy and natural resource management.
Official Print Publication Date
Website Publication DateFebruary 27, 2006


Report to the Scottish Executive Environment and Rural Affairs Department
by Uwe Latacz-Lohmann, University of Kiel, Germany and Steven Schilizzi University of Western Australia
15 October 2005
ISBN 0 7559 1327 2 (Web only publication)
This document is also available in pdf format 1.4 MB)


Executive summary

1. Introduction
1.1 Background to the study
1.2 Objectives
1.3 Methodology
1.4 Outline of the report

2. Limits of agri-environmental contracting
2.1 Adverse selection - targeting the 'wrong' farmers
2.2 Moral hazard - incentives to evade contract requirements
2.3 Dynamic inefficiency - Lack of incentives for entrepreneurship ……
2.4 Uncertainty over property rights
2.5 Information asymmetry and transaction costs

3. Agri-environmental contract design with limited information
3.1 Policy design to address adverse selection
Self selection mechanisms (through contract menus)
Auction mechanisms
3.2 Policy mechanisms to address moral hazard
3.3 Payments linked to activities or outcomes?

4. Conservation auction design
4.1 Basic auction forms
4.2 Characteristics of conservation auctions
4.3 Auction design to achieve specific outcomes
4.3.1 The choice of payment format: discriminatory or uniform pricing
Impact on bidding strategies
Impact on payment
Practical considerations

4.3.2 Reserve prices and reserve quantities
4.3.3 Target-constrained or budget-constrained auctions?
4.3.4 Dealing with bidder learning in repeated auctions
4.3.5 Capturing conservation synergies
4.3.6 Bid evaluation systems
Eligibility criteria
Bid pools
Bid discrimination mechanisms
Using Data Envelope Analysis to rank bids

4.3.7 Information hidden versus information revealed to bidders
Bidders with private information on service attributes
Agency with private information on service attributes
Evidence from economic experiments

5. Case studies of conservation auctions
5.1 Results of postal survey
5.2 Conservation Reserve Program auction ( USA)
5.3 BushTender Trial (Australia)
5.4 Auction for Landscape Recovery (Australia)
5.5 Eco-Tender (Australia)
5.6 Challenge Fund Scheme ( UK)
5.7 Grassland Conservation Pilot Tender (Germany)
5.8 Auction trial with outcome-based payment scheme (Germany)..
5.9 Other conservation auction schemes

6. Conservation auction performance
6.1 Measuring auction performance
6.2 Simulation studies
6.3 Laboratory studies of conservation auctions
6.4 Evidence from field pilot auctions

7. Conclusions and recommendations

  • Key considerations
  • Implications for agri-environmental management in Scotland
  • A possible way forward


Appendix 1: A formal analysis of the moral hazard problem
Appendix 2: A bidding model for multi-unit conservation auctions with a budget constraint
Appendix 3: Australian Conservation Auction Projects (end 2004)
Appendix 4: Simultaneous sealed-bid multiple identical unit procurement auction with symmetric independent private values
Appendix 5: Structure of DEA-based bid ranking models

Table of tables

Table 1: Dynamic BC versus TC auction performance, Kiel
Table 2: BushTender results
Table 3: Scoring system used for the Grampian Challenge Fund
Table 4: Areas planted under the Scottish Challenge Funds
Table 5: WGS and Challenge Fund payments
Table 6: Performance of discriminatory auction relative to fixed price schemes …
Table 7: First-round auction performance vis-à-vis fixed-price scheme, Kiel …
Table 8: Comparison of fixed-price scheme to BushTender price discriminating auction
Table 9: Cost effectiveness of the ALR pilot auction assessed against different counterfactuals
Table 10: LMC Menu Scheme: measures and payment rates

Table of figures

Figure 1A: Cost-effectiveness of uniform pricing ( UP) versus discriminatory pricing ( DP) when UP is less cost-effective than DP in a budget-constrained auction
Figure 1B: Cost-effectiveness of uniform pricing ( UP) versus discriminatory pricing ( DP) when UP is more cost-effective than DP in a budget-constrained auction
Figure 2: Bid scoring criteria for the Conservation Reserve Programme
Figure 3A: Discriminatory auction and fixed-price scheme: when the FPS is more cost-effective for a given budget
Figure 3B: Discriminatory auction and fixed-price scheme: when the FPS is less cost-effective for a given budget
Figure 4: Supply curves from BushTender

Table of boxes

Box 1: Assumptions of standard auction theory
Box 2: Conservation auction descriptors
Box 3: Setup of the budget-constrained versus target-constrained auction experiments
Box 4: Selecting productive, effective conservation activities
Box 5: Impact of information setting on bidding behaviour and auction outcomes ..
Box 6: Lessons learned from the BushTender pilots according to Gary Stoneham ..
Box 7: Details of agent-based computational bidding model used by Hailu and Schilizzi (2004)
Box 8: Alternative benchmark schemes for evaluating the cost-effectiveness of an auction