Buying beetles and bats: iterative combinatorial auction designs for conservation

[Truncated abstract] Procurement of environmental services from private landholders is one of the main mechanisms of present-day environmental policies. In 1986, under its Conservation Reserve Program (CRP), the US Department of Agriculture (USDA) pioneered the use of auctions to pay landholders to provide environmental services. The auctions offered significant advantages in terms of efficiency and cost minimization by revealing private information on opportunity costs and the biodiversity resources held by landholders (Shoemaker 1988). Auctions are now used in the European Union and Australia as part of conservation programs. Almost all of the conservation auctions have targeted multiple environmental services. Typically, environmental indices (EIs) are used to combine the benefits of multiple projects into an overall environmental benefit score in the selection of successful projects. However, auctions relying on the reduction of all benefits to a simple summary measure are not necessarily the best way to offer incentives. In particular, higher flexibility and efficiency can be achieved by allowing bidders to offer different combinations of conservation benefits or practices in auctions. In this regard, combinatorial auctions allow bidders to express their preferences for combination of projects and are an attractive alternative. In combinatorial auctions, bidders can submit bids on individual items as well as on bundles of items, thus taking advantage of the cost complementarities in their valuations of bundles. Moreover, landholders are likely to be able to vary the level of services for individual targets. Therefore, technically, these types of auctions are multiple unit combinatorial auctions.