Location: 368A Heady Hall
Description: Scott Swinton
"Limitations of Auctions for Cost-Effective Payment for Farmers to Abate Phosphorus Runoff"
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 many farmers choose to bid so that the auctioneer can evaluate numerous projects for targeted funding. As a part of ongoing efforts to address harmful algal blooms in Lake Erie, reverse auctions were used to allocate payments for phosphorus reduction practices in two NW Ohio counties. Bids were evaluated based on their expected environmental benefits -- specifically their estimated reductions in phosphorus loadings to Lake Erie based on hydrological models applied to their farm. Bidding was thin. A follow-up survey revealed that complexity of the bidding process and the need to negotiate with renters deterred participation. 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 three conservation programs. Results reveal that when perceived transaction costs of bid preparation are high, auction programs that rank bidders are less cost-effective than spatially targeted, fixed conservation payments that attract higher participation.
Contact Person: Wendong Zhang