Auctioning conservation contracts: A theoretical analysis and an application

Auction theory is used to analyze the potential benefits of auctions in allocating contracts for the provision of nonmarket goods in the countryside. A model of optimal bidding for conservation contracts is developed and applied to a hypothetical conservation program. Competitive bidding, compared to fixed-rate payments, can increase the cost effectiveness of conservation contracting significantly. The cost revelation mechanism inherent in the bidding process makes auctions a powerful means by which to reduce the problems of information asymmetry. Strategic bidding behavior, which may adversely affect the performance of sequential auctions, is difficult to address by means of auction design.