AUCTIONS AS A MEANS OF CREATING A MARKET FOR PUBLIC-GOODS FROM AGRICULTURE

The paper looks at the possibility of creating a market for environmen tal goods and services in the countryside by awarding conservation con tracts to fanners on the basis of competitive bidding. Auctions have s everal theoretical advantages over alternative allocation mechanisms ( such as standard-rate payments) because they allow, the participants t o deal with informational asymmetries and the uncertainty about the va lue of the (non-market) goods being traded. A formal model of bidding behaviour in 'green auctions' shows that bidding strategies are determ ined by the individual farmers' costs of implementing the conservation contracts and their beliefs about the maximum acceptable payment leve l, making the auction an imperfect cost revelation mechanism. Auctions can reduce the information rents accruing to farmers and can increase the cost-effectiveness of public goods provision. Strategic bidding b ehaviour in multiple-signup auctions as well as high transaction costs are potential sources of reduced efficiency.