Auctioning risky conservation contracts

B. Wichmann, Peter C. Boxall, S. Wilson, O. Pergery

Research output: Contribution to journalArticlepeer-review

9 Citations (Scopus)


Conservation auctions have the potential to increase the efficiency of payments to farmers to adopt conservation-friendly management practices by fostering competition among them. The literature considers bidders that have complete information about the costs of adoption and optimal bidding behavior reflects this information advantage. Farmers seek information rents and bids decrease when risk aversion increases because farmers are more averse to losing the auction. We contribute to the literature by allowing for cost risk. Our paper shows that farmers must balance the risk of losing the auction (thus foregoing information rent) with the risk of submitting a bid that is not high enough to pay the costs of adopting conservation practices (thus incurring losses). We design an experiment to trade off these two risks and examine how risk aversion affects bidding behavior when participants face different sources and levels of risk. Our experiment contributes to a small literature on experimental auctions with risky product valuations. We find that participants decrease their bids as risk aversion increases, even in auctions with cost risk, suggesting that the risk of losing the auction dominates. These findings uncover new challenges for the practical implementation of conservation auctions as an efficient policy instrument.
Original languageEnglish
Pages (from-to)1111-1144
Number of pages34
JournalEnvironmental and Resource Economics
Issue number4
Early online date24 Aug 2016
Publication statusPublished - 1 Dec 2017


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