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

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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.

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Environmental and Resource Economics