Improving the Cost-Effectiveness of the Conservation Reserve Program: A Laboratory Study

46 Pages Posted: 18 Apr 2018 Last revised: 15 Apr 2019

See all articles by Peter Cramton

Peter Cramton

University of Maryland - Department of Economics

Daniel Hellerstein

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS), Resource and Rural Economics Division

Nathaniel Alan Higgins

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Richard Iovanna

U.S. Department of Agriculture (USDA)

Kristian López Vargas

University of California, Santa Cruz

Steve Wallander

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Date Written: April 15, 2019

Abstract

The Conservation Reserve Program (CRP) is arguably the world's largest conservation program on private lands, with $1.8 billion paid to farmers in 2017 for practices on 23.4 million acres. Existing theory and literature suggest that a modified auction structure could make CRP more cost-effective. Using a laboratory experiment, we study several auction alternatives and test their efficiency and cost-effectiveness. We begin with an analysis of variation in price-cap tightness since the current format is similar to a tight price cap. We find that excessive tightening of price caps forces participants out, damaging efficiency and cost-effectiveness. Substantial relaxation of the price cap hurts cost-effectiveness by allowing higher rents. Given these challenges, we also consider two alternative formats based on reference prices, which are determined either exogenously or endogenously. The exogenous reference price format allows medium-cost sellers to submit offers that are competitive against low-cost sellers, hurting both efficiency and cost-effectiveness. The endogenous reference price outperforms the exogenous reference price in terms of cost-effectiveness by increasing participation and reducing rents.

Keywords: Auctions, Conservation, Market Design, Conservation Reserve Program

JEL Classification: C91, D47, N52

Suggested Citation

Cramton, Peter C. and Hellerstein, Daniel and Higgins, Nathaniel Alan and Iovanna, Richard and López Vargas, Kristian and Wallander, Steve, Improving the Cost-Effectiveness of the Conservation Reserve Program: A Laboratory Study (April 15, 2019). Available at SSRN: https://ssrn.com/abstract=3164730 or http://dx.doi.org/10.2139/ssrn.3164730

Peter C. Cramton

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-6987 (Phone)
301-405-3542 (Fax)

Daniel Hellerstein

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS), Resource and Rural Economics Division ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
202-694-5613 (Phone)
202-694-5756 (Fax)

Nathaniel Alan Higgins

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
(202) 694-5602 (Phone)

Richard Iovanna

U.S. Department of Agriculture (USDA) ( email )

1301 New York Ave. NW
Washington, DC 20250
United States

Kristian López Vargas (Contact Author)

University of California, Santa Cruz ( email )

1156 High Street
Economics
Santa Cruz, CA 95064
United States

HOME PAGE: http://kmlv.github.io/

Steve Wallander

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
(202) 694-5546 (Phone)

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