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Abstract
In a world free of transaction costs, reverse auctions can cost-effectively allocate
payment for environmental service contracts by targeting projects that provide the most
benefit per dollar spent. However, auctions only succeed if enough farmers choose to bid
so that the auctioneer can evaluate numerous projects for targeted funding. A 2014
conservation auction to allocate payments for phosphorus reduction practices in NW
Ohio experienced very thin bidding. According to a follow-up survey, auction
participation was deterred by the complexity of the bidding process and the need to
negotiate with renters. Due to low participation, the actual conservation auction made
payments for phosphorus reduction that were surprisingly costly at the margin. Applying
a farmer behavioral model to the Western Lake Erie Basin, we simulate participation
choice and cost-effectiveness of environmental outcomes in reverse auctions and uniform
payment conservation programs. Results reveal that when perceived transaction costs of
bid 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