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Designing Cost Effective Auctions as Instruments to Reduce Nutrients Run-off from Agriculture into the Baltic Sea - An Experimental Study

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  • Larsen, Karen
  • Ollikainen, Markku

Abstract

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.

Suggested Citation

  • Larsen, Karen & Ollikainen, Markku, 2011. "Designing Cost Effective Auctions as Instruments to Reduce Nutrients Run-off from Agriculture into the Baltic Sea - An Experimental Study," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114401, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaae11:114401
    DOI: 10.22004/ag.econ.114401
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    References listed on IDEAS

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    1. Ronald G. Cummings & Charles A. Holt & Susan K. Laury, 2004. "Using laboratory experiments for policymaking: An example from the Georgia irrigation reduction auction," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 23(2), pages 341-363.
    2. Cason, Timothy N. & Gangadharan, Lata & Duke, Charlotte, 2003. "A laboratory study of auctions for reducing non-point source pollution," Journal of Environmental Economics and Management, Elsevier, vol. 46(3), pages 446-471, November.
    3. Uwe Latacz-Lohmann & Carel Van der Hamsvoort, 1997. "Auctioning Conservation Contracts: A Theoretical Analysis and an Application," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 407-418.
    4. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
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