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Transaction Costs, Participation, and the Cost-Effectiveness of Reverse Auctions: Evidence from a Laboratory Experiment

Author

Listed:
  • Tongzhe Li

    (University of Guelph)

  • Leah H. Palm-Forster

    (University of Delaware)

  • Siddika Bhuiyanmishu

    (World Bank)

Abstract

Reverse auctions are often recognized as a tool that can cost-effectively allocate agri-environmental program funds to support environmentally-beneficial land management practices. However, transaction costs can limit participation in auctions which limits their cost-effectiveness. We use a laboratory experiment to examine how various levels of transaction costs influence participation and bidding behavior in discriminatory-price reverse auctions in low and high budget scenarios. Our experimental results show that transaction costs limit auction participation, increase bid amounts, and reduce cost-effectiveness. The negative effect of transaction costs on participation is particularly large when the budget level is low. Using the results of our experiment, we design a simulation to investigate whether reducing transaction costs via subsidies could increase program cost-effectiveness under various conditions. We find that transaction cost subsidies increase auction cost-effectiveness; however, our study raises new questions about how these subsidies are designed and the implications for the overall costs and benefits of efforts to reduce transaction costs in reverse auctions.

Suggested Citation

  • Tongzhe Li & Leah H. Palm-Forster & Siddika Bhuiyanmishu, 2025. "Transaction Costs, Participation, and the Cost-Effectiveness of Reverse Auctions: Evidence from a Laboratory Experiment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 88(2), pages 397-424, February.
  • Handle: RePEc:kap:enreec:v:88:y:2025:i:2:d:10.1007_s10640-024-00935-1
    DOI: 10.1007/s10640-024-00935-1
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    More about this item

    Keywords

    Agri-environmental policy; Conservation tender; Participation rate; Payment for environmental services; Reverse auction; Transaction costs;
    All these keywords.

    JEL classification:

    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q24 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Land
    • Q15 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Land Ownership and Tenure; Land Reform; Land Use; Irrigation; Agriculture and Environment

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