This research studies the use of auctions for reducing leaching of phosphorus and nitrogen into the Baltic Sea. Auctions are introduced as a tool for creating environmental contracts in agriculture for the first time in Finland. A controlled laboratory experiment is used to analyze the effect of introducing a bundle mechanism in the auction. Landholders submit sealed bids on multiple parcels in a one shot reverse auction. Each parcel is assigned an environmental quality and varies in size. In one treatment landholders can offer bids on environmental contracts for their parcels individually. In the other treatment landholders are given the opportunity to bundle parcels of land together when submitting bids as well as submitting bids for individual parcels. The results suggest that the bundle mechanism increase environmental efficiency of the auction compared to the individual parcel auction. In the treatment with individual parcel bids environmental value significantly affects over half of landholders’ offers. The bundle treatment however shows sign of a cognitive bias where landholders use the hectare size to determine their offers.


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