Too Burdensome to Bid: Transaction Costs and Pay-for-Performance Conservation Report as inadecuate

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In a world free of transaction costs, reverse auctions can cost-effectively allocatepayment for environmental service contracts by targeting projects that provide the mostbenefit per dollar spent. However, auctions only succeed if enough farmers choose to bidso that the auctioneer can evaluate numerous projects for targeted funding. A 2014conservation auction to allocate payments for phosphorus reduction practices in NWOhio experienced very thin bidding. According to a follow-up survey, auctionparticipation was deterred by the complexity of the bidding process and the need tonegotiate with renters. Due to low participation, the actual conservation auction madepayments for phosphorus reduction that were surprisingly costly at the margin. Applyinga farmer behavioral model to the Western Lake Erie Basin, we simulate participationchoice and cost-effectiveness of environmental outcomes in reverse auctions and uniformpayment conservation programs. Results reveal that when perceived transaction costs ofbid preparation are high, reverse auctions are less cost-effective than spatially targeted,uniform payment programs that attract higher participation.Keywords: reverse auctions, transaction costs, cost-effective, conservation programs,endogenous participation

Subject(s): Agribusiness

Agricultural and Food Policy

Agricultural Finance

Issue Date: 2015

Publication Type: Conference Paper/ Presentation

PURL Identifier:

Total Pages: 41

Record appears in: Agricultural and Applied Economics Association (AAEA) > 2016 Allied Social Sciences Association (ASSA) Annual Meeting, January 3-5, 2016, San Francisco, California

Author: Palm-Forster, Leah H. ; Swinton, Scott M. ; Lupi, Frank ; Shupp, Robert S.


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