AUCTIONING CONSERVATION CONTRACTS - A THEORETICAL-ANALYSIS AND AN APPLICATION

Auction theory is used to analyze the potential benefits of auctions i n allocating contracts for the provision of nonmarket goods in the cou ntryside. A model of optimal bidding for conservation contracts is dev eloped and applied to a hypothetical conservation program. Competitive bidding, compared to fixed-rate payments, can increase the cost effec tiveness of conservation contracting significantly. The cost revelatio n mechanism inherent in the bidding process makes auctions a powerful means by which to reduce the problems of information asymmetry. Strate gic bidding behavior, which may adversely affect the performance of se quential auctions, is difficult to address by means of auction design.