An experimental examination of target based conservation auctions

Conservation auctions are increasingly employed to increase the provision of Ecological Goods and Services (EG&S) for achieving environmental goals. Most applications of conservation auctions concern the efficient allocation of a fixed conservation budget. However an important and under-explored application of conservation auctions is in meeting environmental targets, either as part of regulatory compliance by industry or by governments in meeting specified policy objectives. This paper examines the ability of a conservation auction to meet an environmental target. We use experimental economics methods benchmarked to a wetlands restoration case study to examine bidder behavior and efficiency in both budget constrained and target constrained auctions when landowners with increasing marginal costs can offer increasing sized bundles of wetland acres. The target constrained auction is characterized by an all or nothing rule, where there is no payout if the target is not met. We find that rent seeking and average cost in the target constrained auction is less than in a budget constrained auction, but that efficiency eroded in repeated rounds suggesting learning effects as participants realize there is no budget cap. Even with learning effects the target based auction out-performs the budget based auction. Adding a reserve price to the target based auction significantly reduced rent seeking but also increased the probability that the target was not met. The results have important implications for auction design in real world settings.