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

56 Pages Posted: 18 Apr 2018 Last revised: 18 Dec 2020

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 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

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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