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Improving the cost-effectiveness of the Conservation Reserve Program: A laboratory study

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  • Cramton, Peter
  • Hellerstein, Daniel
  • Higgins, Nathaniel
  • Iovanna, Richard
  • López-Vargas, Kristian
  • Wallander, Steven

Abstract

The Conservation Reserve Program (CRP) is arguably the world's largest payments-for-ecosystem services program, with $1.8 billion paid to farmers in 2017 for practices on 23.4 million acres. The CRP uses a pay-as-bid, reverse auction with field-specific price caps to enroll most of the land in the program. Economic theory and empirical studies from other domains suggest that the restrictive price-cap auction format used in the current design of the CRP exhibits issues in terms of efficiency and cost-effectiveness. Using a laboratory experiment, we study the impact of varying the tightness of the price-cap auctions. We also examine two alternative auction formats based on reference prices. We find that excessively tight bid caps reduce efficiency and cost effectiveness by discouraging participation. Conversely, bid caps set too high also reduce cost-effectiveness by allowing higher rents. An exogenous reference price ranking format, which makes medium-cost sellers more competitive against low-cost sellers, reduces both efficiency and cost-effectiveness. An endogenous reference price format increases cost-effectiveness by increasing participation and reducing rents.

Suggested Citation

  • Cramton, Peter & Hellerstein, Daniel & Higgins, Nathaniel & Iovanna, Richard & López-Vargas, Kristian & Wallander, Steven, 2021. "Improving the cost-effectiveness of the Conservation Reserve Program: A laboratory study," Journal of Environmental Economics and Management, Elsevier, vol. 108(C).
    • Handle: RePEc:eee:jeeman:v:108:y:2021:i:c:s009506962100022x
    DOI: 10.1016/j.jeem.2021.102439
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    Cited by:

    1. Liu, Zhaoyang & Banerjee, Simanti & Cason, Timothy N. & Hanley, Nick & Liu, Qi & Xu, Jintao & Kontoleon, Andreas, 2023. "Spatially Coordinated Conservation Auctions: A Framed Field Experiment Focusing on Farmland Wildlife Conservation in China," 97th Annual Conference, March 27-29, 2023, Warwick University, Coventry, UK 334572, Agricultural Economics Society - AES.
    2. Yu, Zhenning & She, Shuoqi & Xia, Chuyu & Luo, Jiaojiao, 2023. "How to solve the dilemma of China’s land fallow policy: Application of voluntary bidding mode in the Yangtze River Delta of China," Land Use Policy, Elsevier, vol. 125(C).

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    More about this item

    Keywords

    Auctions; Market design; Conservation; Conservation reserve program; Price cap; Bid cap; Reference price; Procurement auction;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • N52 - Economic History - - Agriculture, Natural Resources, Environment and Extractive Industries - - - U.S.; Canada: 1913-

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