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Bidding behavior in environmental contract auctions with incomplete monitoring

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  • Romstad, Eirik
  • Alfnes, Frode

Abstract

It is well known from the compliance literature that whenever it costly to monitor agents' compliance to contract terms, compliance is likely to be incomplete. This paper goes one step further by examining the implications of incomplete monitoring on agent's sales offers in auctions for environmental contracts. From a monitoring perspective we show allocation contracts to least cost also produces another gain – that less resources need to be spend on monitoring and enforcement. To get full use of this insight one needs to have auction procedures that provide incentives for truthful revelation of agents' private alternate incomes. Our second result is that the incentives for truthful revelation is lost when monitoring is incomplete unless the expected value of compliance exceeds the expected value of noncompliance. We demonstrate this result theoretically and through an economic experiment using an induced value reverse multi unit auction.

Suggested Citation

  • Romstad, Eirik & Alfnes, Frode, 2011. "Bidding behavior in environmental contract auctions with incomplete monitoring," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 115985, European Association of Agricultural Economists.
  • Handle: RePEc:ags:eaae11:115985
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    References listed on IDEAS

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    1. Andrew Moxey & Ben White & Adam Ozanne, 1999. "Efficient Contract Design for Agri-Environment Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(2), pages 187-202.
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    3. Greenberg, Joseph, 1984. "Avoiding tax avoidance: A (repeated) game-theoretic approach," Journal of Economic Theory, Elsevier, vol. 32(1), pages 1-13, February.
    4. Shavell, Steven, 1987. "The Optimal Use of Nonmonetary Sanctions as a Deterrent," American Economic Review, American Economic Association, vol. 77(4), pages 584-592, September.
    5. Gary Stoneham & Vivek Chaudhri & Arthur Ha & Loris Strappazzon, 2003. "Auctions for conservation contracts: an empirical examination of Victoria's BushTender trial," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 47(4), pages 477-500, December.
    6. Isabelle Huault & V. Perret & S. Charreire-Petit, 2007. "Management," Post-Print halshs-00337676, HAL.
    7. Ferraro, Paul J., 2008. "Asymmetric information and contract design for payments for environmental services," Ecological Economics, Elsevier, vol. 65(4), pages 810-821, May.
    8. Michael A. Taylor & Brent Sohngen & Alan Randall & Helen Pushkarskaya, 2004. "Group Contracts for Voluntary Nonpoint Source Pollution Reductions: Evidence from Experimental Auctions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(5), pages 1196-1202.
    9. 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.
    10. Rob Hart, 2005. "Combating moral hazard in agri-environmental schemes: a multiple-agent approach," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 32(1), pages 75-91, March.
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    More about this item

    Keywords

    environmental contract auctions; monitoring and compliance; truthful revelation; Environmental Economics and Policy; Resource /Energy Economics and Policy;

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