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Abstract
It is well known from the compliance literature that whenever it costly to
monitor agents' compliance to contract terms, compliance is likely to be
incomplete. This paper goes one step further by examining the implications of
incomplete monitoring on agent's sales offers in auctions for environmental
contracts.
From a monitoring perspective we show allocation contracts to least cost also
produces another gain – that less resources need to be spend on monitoring and
enforcement. To get full use of this insight one needs to have auction procedures
that provide incentives for truthful revelation of agents' private alternate
incomes.
Our second result is that the incentives for truthful revelation is lost when
monitoring is incomplete unless the expected value of compliance exceeds the
expected value of noncompliance. We demonstrate this result theoretically and
through an economic experiment using an induced value reverse multi unit
auction.