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Lock-in effects in competitive bidding schemes for payments for ecosystem services: Revisiting the fundamental transformation

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  • Vogt, Nora
  • Bizer, Kilian
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    Abstract

    Competitive bidding is considered to be a cost-effective allocation mechanism for payments for ecosystem services. This article shows that competition is not a necessary condition for sustaining cost-effectiveness in the long run. In a repeated conservation auction, learning, specific investments and the creation of social capital bias the chances of winning a follow-up contract in favour of former auction winners. Applying the concept of fundamental transformation (Williamson 1985), we argue that this asymmetry weakens competition and leads to lock-in effects between the auctioning agency and a stable pool of sellers with uncertain consequences for cost-effectiveness. We compare data from two laboratory experiments on auction-based conservation programmes and show under which conditions lock-in effects are likely to occur in a controlled environment. Our findings demonstrate lock-in effects do not erode the effectiveness of an auction but change the rules of the game towards more favourable conditions for the provision of the targeted good or service. In view of the empirical evidence for a superior performance of long-term contract relationships compared to low-cost short-term contracting, we discuss directions for follow-up empirical work. --

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    Bibliographic Info

    Paper provided by University of Goettingen, Department of Economics in its series Center for European, Governance and Economic Development Research Discussion Papers with number 158.

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    Date of creation: 2013
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    Handle: RePEc:zbw:cegedp:158

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    Postal: Platz der Göttinger Sieben 3, 37073 Göttingen
    Web page: http://www.cege.wiso.uni-goettingen.de/
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    Keywords: trust; social capital; asset specificity; cost-effectiveness; conservation auctions; payments for ecosystem services;

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    1. Vogt, Nora & Reeson, Andrew F. & Bizer, Kilian, 2013. "Communication, competition and social gift exchange in an auction for public good provision," Ecological Economics, Elsevier, Elsevier, vol. 93(C), pages 11-19.
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    6. Ferraro, Paul J., 2008. "Asymmetric information and contract design for payments for environmental services," Ecological Economics, Elsevier, Elsevier, vol. 65(4), pages 810-821, May.
    7. Nikoleta Jones, 2010. "Investigating the influence of social costs and benefits of environmental policies through social capital theory," Policy Sciences, Springer, Springer, vol. 43(3), pages 229-244, September.
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    17. Steven Schilizzi & Uwe Latacz-Lohmann, 2007. "Assessing the Performance of Conservation Auctions: An Experimental Study," Land Economics, University of Wisconsin Press, vol. 83(4), pages 497-515.
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    19. Ruben N. Lubowski & Michael J. Roberts, 2005. "How Cost-Effective Are Land Retirement Auctions? Estimating the Difference between Payments and Willingness to Accept in the Conservation Reserve Program," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 87(5), pages 1239-1247.
    20. Sullivan, Patrick & Hellerstein, Daniel & Hansen, LeRoy T. & Johansson, Robert C. & Koenig, Steven R. & Lubowski, Ruben N. & McBride, William D. & McGranahan, David A. & Roberts, Michael J. & Vogel, S, 2004. "The Conservation Reserve Program: Economic Implications for Rural America," Agricultural Economics Reports, United States Department of Agriculture, Economic Research Service 33987, United States Department of Agriculture, Economic Research Service.
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