Improving the Cost-Effectiveness of the Conservation Reserve Program: A Laboratory Study
56 Pages Posted: 18 Apr 2018 Last revised: 18 Dec 2020
Date Written: April 15, 2019
The Conservation Reserve Program (CRP) is arguably the world’s largest payments-for-ecosystem services program, with $1.8 billion paid to farmers in 2017 for practices on23.4 million acres. The CRP uses a pay-as-bid, reverse auction with field-specific price caps to enroll most of the land in the program. Economic theory and empirical studies from other domains suggest that the restrictive price-cap auction format used in the cur-rent design of the CRP exhibits issues in terms of efficiency and cost-effectiveness. Using a laboratory experiment, we study the impact of varying the tightness of the price-cap auctions. We also examine two alternative auction formats based on reference prices.We find that excessively tight bid caps reduce efficiency and cost effectiveness by discouraging participation. Conversely, bid caps set too high also reduce cost-effectiveness by allowing higher rents. An exogenous reference price ranking format, which makes medium-cost sellers more competitive against low-cost sellers, reduces both efficiency and cost-effectiveness. An endogenous reference price format increases cost-effectiveness by increasing participation and reducing rents.
Keywords: Auctions, Conservation, Market Design, Conservation Reserve Program
JEL Classification: C91, D47, N52
Suggested Citation: Suggested Citation