Improving the Cost-Effectiveness of the Conservation Reserve Program: A Laboratory Study
46 Pages Posted: 18 Apr 2018 Last revised: 15 Apr 2019
Date Written: April 15, 2019
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: Suggested Citation