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Additionality and Asymmetric Information in Environmental Markets: Evidence from Conservation Auctions

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  • Aspelund, Karl M.
  • Russo, Anna

Abstract

Market mechanisms aim to reduce environmental degradation at low cost, but they are undermined when participants’ conservation actions are not marginal to the incentive — or “additional” —as the lowest-cost participants may not be the highest social value. We investigate this challenge in the Conservation Reserve Program’s auction mechanism for ecosystem services, linking bids to satellite-derived land use. Three-quarters of marginal auction winners are not additional. The heterogeneity in counterfactual land use introduces adverse selection. We develop a model of bidding and additionality to quantify welfare implications. Alternative auctions increase efficiency by using scoring rules that incorporate expected land use impacts.

Suggested Citation

  • Aspelund, Karl M. & Russo, Anna, 2025. "Additionality and Asymmetric Information in Environmental Markets: Evidence from Conservation Auctions," 2025 AAEA & WAEA Joint Annual Meeting, July 27-29, 2025, Denver, CO 361138, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea25:361138
    DOI: 10.22004/ag.econ.361138
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    References listed on IDEAS

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    1. Milgrom, Paul, 1987. "Adverse Selection Without Hidden Information," Department of Economics, Working Paper Series qt62t1w8hf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    2. Engel, Stefanie & Pagiola, Stefano & Wunder, Sven, 2008. "Designing payments for environmental services in theory and practice: An overview of the issues," Ecological Economics, Elsevier, vol. 65(4), pages 663-674, May.
    3. Daniel Ackerberg, 2009. "A new use of importance sampling to reduce computational burden in simulation estimation," Quantitative Marketing and Economics (QME), Springer, vol. 7(4), pages 343-376, December.
    4. Johnson, Kris A. & Dalzell, Brent J. & Donahue, Marie & Gourevitch, Jesse & Johnson, Dennis L. & Karlovits, Greg S. & Keeler, Bonnie & Smith, Jason T., 2016. "Conservation Reserve Program (CRP) lands provide ecosystem service benefits that exceed land rental payment costs," Ecosystem Services, Elsevier, vol. 18(C), pages 175-185.
    5. Hendricks, Kenneth & Porter, Robert H, 1988. "An Empirical Study of an Auction with Asymmetric Information," American Economic Review, American Economic Association, vol. 78(5), pages 865-883, December.
    6. Juan-Pablo Montero, 1999. "Voluntary Compliance with Market-Based Environmental Policy: Evidence from the U.S. Acid Rain Program," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 998-1033, October.
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    Cited by:

    1. Rosenberg, Andrew & Gramig, Benjamin M. & Beeson, Peter & Iovanna, Rich, 2025. "Additionality and Persistence of Afforestation Incentives: Evidence from the Conservation Reserve Program," 2025 AAEA & WAEA Joint Annual Meeting, July 27-29, 2025, Denver, CO 360765, Agricultural and Applied Economics Association.

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