World Development Vol. xx, No. x, pp. xxx–xxx, 2012
! 2011 Elsevier Ltd. All rights reserved.
0305-750X/$ - see front matter
www.elsevier.com/locate/worlddev
doi:10.1016/j.worlddev.2011.12.007
Auction Design for the Private Provision of Public Goods in
Developing Countries: Lessons from Payments for
Environmental Services in Malawi and Indonesia
OLUYEDE C. AJAYI
ICRAF Southern Africa, Lilongwe, Malawi
B. KELSEY JACK
Tufts University, MA, USA
and
BERIA LEIMONA *
ICRAF Southeast Asia, Bogor, Indonesia
Summary. — Payments for environmental services programs use direct incentives to improve the environmental impacts of private land
use decisions. An auction offers an approach to efficiently allocating contracts among least-cost landholders, which can improve the
overall cost-effectiveness of the approach. However, experiences with auctions in developing country settings are limited. We compare
the results of two case studies that use auctions to allocate payments for environmental service contracts in Indonesia and Malawi. While
the settings and the contracts differ, regularities in auction design allow comparisons and general lessons about the application of auctions to payments for environmental services programs.
! 2011 Elsevier Ltd. All rights reserved.
Key words — payments for environmental services, cost-effectiveness, auction, land use, Malawi, Indonesia
1. INTRODUCTION
ative to alternative allocation approaches, though potentially
at higher prices. Both cases used a budget constrained pricing
approach in the auction, which resulted in around 40% of bidders receiving contracts. Imperfect contract implementation in
both cases is consistent with variable opportunity costs of
implementation. Finally, the distributional implications of
the program implementation in both cases suggest some correlation between socioeconomic status and contract allocation,
favoring better-off landholders in Indonesia and worse-off
landholders in Malawi. Whether the contract actually serves
to improve livelihoods remains an open question.
In the next section, we discuss the current trend of payments
for environmental services in the developing world. Section 3
Payments for environmental services (PES) offer a theoretically elegant approach to resolving the externalities that flow
from private land use decisions. The apparent logic of using
direct incentives to achieve environmental and conservation
objectives has contributed to the increasing popularity of
PES and similar initiatives. In developing countries in particular, the number of PES programs and projects continues to
grow. 1 Careful attention to program design, combined with
rigorous testing at the pilot stage, can help ensure that the
PES approach meets its potential and does so cost effectively.
In particular, the design and implementation of PES programs
are susceptible to information asymmetries between the implementing organization or the buyers of environmental services
and the service providers. If some landholders can deliver the
service more cheaply, then targeting them for inclusion in the
program will lower overall program costs (Ferraro, 2008). 2
This paper describes the implementation of two auctions
used to allocate environmental service contracts to the lowest
cost landholders. To our knowledge, these are among the first
PES auctions implemented in developing country settings. We
compare the auction designs and their outcomes, and discuss
potential policy lessons. Though the settings in which these
two cases were implemented differ on several dimensions, similarities in auction design allow us to make comparisons and
identify common lessons regarding PES auction design in
developing countries.
To briefly summarize our findings, we show evidence consistent with more cost effective allocation under the auctions rel-
* The authors gratefully acknowledge financial assistance provided by the
European Union to ICRAF under the auspices of the “Environmental
Governance Project in Africa” and, the Irish Aid through their support to
the “Agroforestry Food Security Project.” Funding was also provided by
the International Fund for Agriculture and Development (IFAD) and the
Economy and Environment Programme for Southeast Asia (EEPSEA).
Jack received research support from the Sustainability Science Program at
Harvard University and the Weatherhead Center for International Affairs.
We are grateful to Festus Akinnifesi, Meine van Noordwijk, Brent Swallow, William Clark, and Christopher Avery for support and advice, Stanley Mvula, and Rachman Pasha for assistance in the field, and the
farmers who collaborated with us throughout the study. The study does
not represent the official view of the organizations and individuals mentioned above. Any errors or omissions contained herein are the authors’
responsibility only. Final revision accepted: November 11, 2011.
1
Please cite this article in press as: Ajayi, O.C. et al. Auction Design for the Private Provision of Public Goods in Developing Countries: Lessons from
Payments for Environmental Services in Malawi and Indonesia, World Development (2012), doi:10.1016/j.worlddev.2011.12.007
2
WORLD DEVELOPMENT
describes how auctions resolve the information asymmetry in
contract allocation, and Section 4 discusses the particular
challenges presented by developing country implementation.
We present the two case studies in Section 5, first discussing
the Indonesia case then showing a similar set of analyses for
Malawi. In Section 6, we provide a comparison of the results.
Finally, we conclude with policy lessons and areas for future
research.
2. PAYMENTS FOR ENVIRONMENTAL SERVICES
AND ASYMMETRIC INFORMATION
(a) Agricultural externalities and environmental services
Environmental services from agricultural land represent a
classic externality problem, in which private actors will not
act in society’s best interest if the costs or benefits of their actions are shared with others. In his seminal articles on the
structure of the externality problem, Coase (1959, 1960) referenced environmental externalities, including stream contamination. In most cases, environmental externalities from
agriculture are not priced, and by maximizing his or her
own income from agricultural land, a farmer may generate
negative externalities.
Putting a price on the externality, through either a tax on
pesticide use or a subsidy on abatement, will reduce the production of negative externalities and improve social welfare
as long as the marginal cost of abatement is lower than the
marginal social benefits from abatement. While either a tax
or a subsidy can be used to generate the desired behavior
change, the choice between these options has distributional
implications. An optimal payment for environmental service
provision will, therefore, align the landholder’s private benefit
from undertaking land use practices that produce the externality with the social benefits from that externality. 3
While resolving agricultural externalities and increasing
environmental service provision by changing prices poses a
straightforward solution in theory, it can be extremely difficult
to design a feasible policy or program to implement such an
approach. A number of articles summarize the challenges
associated with design and implementation of PES programs
in developing countries (Bulte, Lipper, Stringer, & Zilberman,
2008; Jack, Kousky, & Sims, 2008; Leimona, Joshi, & van
Noordwijk, 2009; Wunder, Engel, & Pagiola, 2008 ). While
the literature on PES in developing countries is large and varied, we focus here on the particular challenges associated with
the private information held by landholders, and discuss context-dependent equity considerations in Section 4.
(b) Who to pay and how much to pay them?
PES designers must determine who, among eligible participants, should be selected for compensation or contracting.
In a smoothly functioning market, this question is trivial since
trading will occur, prices will adjust, and contracts will end up
in the hands of those who can provide at least cost (Montgomery, 1972). If, however, transaction costs are substantial because the markets have few participants or because
information is scarce, then the initial allocation of contracts
is important for determining the efficiency of the program
(Stavins, 1995). PES programs in developing countries tend
to resemble markets with prohibitively high trading costs (Perrot-Maı̂tre & Davis, 2001). Therefore, targeting the lowest cost
service providers requires an approach that reveals private
information ex ante. Other authors have discussed the
importance of information asymmetries for PES design (Ferraro, 2008; Jack, Leimona, & Ferraro, 2009; Latacz-Lohmann
& Schilizzi, 2005).
Knowing relative costs of service provision among eligible
landholders is necessary for determining which landholders
should be enrolled in a program. This information resolves
the question of whom to pay, and also how much to pay them.
The relevant cost measure for consideration is the land
holder’s opportunity cost of participating in the program.
Opportunity cost is defined as the difference, in value to the
landholder, between the contract and business as usual without the contract. The value includes risk aversion and other
preferences. Payments below the participant’s opportunity
cost will mean, in many cases, that the environmental service
is not provided either because the contract is not taken up
or because compliance rates are low. Payments above the
opportunity cost mean that more environmental services could
have been purchased with the available funds. While setting
payments equal to opportunity cost is highly cost effective,
paying above opportunity cost may be desirable from a poverty alleviation standpoint. We discuss this and other distributional equity factors in Section 4.
The information asymmetries are irrelevant for design under
the following four scenarios. First, if all landholders have
roughly equal costs of environmental service provision, then
determining which landholders to enroll into a program will
not improve outcomes. Second, if opportunity cost is highly
observable or closely correlated with observable farmer characteristics, then policy makers will be able to predict opportunity costs. Cost flow models are an example of this approach
(Antle & Stoorvogel, 2006). Third, if landholders do not know
their own opportunity costs, then no information asymmetry
exists. If, as is more commonly the case, the opportunity cost
of environmental service provision is heterogeneous across
landholders, and landholders have better information about
these costs than does the policy maker, then a mechanism to
reveal that information will improve program performance.
Finally, opportunity cost may be highly uncertain because of
fluctuations in weather, crop prices, or availability of household labor, making it difficult to predict ex ante. In such a scenario, contracting on expected opportunity costs may lead to
low contract compliance. Dynamic contracts that vary the
incentive price with the opportunity cost may be more effective
at achieving environmental outcomes.
3. AUCTIONS: AN INCENTIVE COMPATIBLE
ALLOCATION MECHANISM
A number of mechanisms can help overcome information
asymmetries by giving participants a direct incentive to tell
the truth—referred to as “incentive compatible” mechanisms.
Certain types of auctions have this property, in which the best
bidding strategy is to bid one’s true value for an object (e.g.,
Vickrey, 1961). With PES contracts, an auction to allocate
contracts creates a temporary market where one otherwise
does not exist. The competition created in this environment
gives participants an incentive to reveal their private information about the lowest payment that would make them willing
to accept an environmental service contract (Ferraro, 2008;
Latacz-Lohmann & Schilizzi, 2005). In this type of “reverse
auction” or procurement auction, only the lowest bidders receive contracts. 4
The case studies described below use a similar auction to
allocate environmental service contracts and to determine
the contract price. We present the general design features
Please cite this article in press as: Ajayi, O.C. et al. Auction Design for the Private Provision of Public Goods in Developing Countries: Lessons from
Payments for Environmental Services in Malawi and Indonesia, World Development (2012), doi:10.1016/j.worlddev.2011.12.007
AUCTION DESIGN FOR THE PRIVATE PROVISION OF PUBLIC GOODS
and the bidding strategy for the PES auctions here to provide
intuition for the incentive compatible nature of the individual
bidding decision. Vickrey (1961) described a second price,
sealed bid auction as a straightforward mechanism with a
dominant bidding strategy of truth-telling. 5 In a reverse procurement set up, the lowest bidder wins but pays the price
bid by the second-lowest bidder. This ensures that the bidder
can do no better than stating his or her own true valuation.
If she bids lower, then she risks winning the auction and getting paid less than the amount she needs to implement the contract. If she bids higher, then she risks losing the auction at a
price she would have been willing to accept. The same bidding
incentives generalize to an auction with multiple units in which
each bidder desires only one of these objects (Vickrey, 1976).
We described an auction with a uniform price scoring rule,
meaning that all winning bids receive the same price. 6 Such
a price rule offers the benefit of setting a price slightly above
bidders’ minimum willingness to accept, and providing a buffer for bidding errors or shocks to opportunity cost. A buffer
may be desirable if actual implementation costs are uncertain.
In an auction for PES contracts, each landholder does her
best by bidding the lowest price that would make her willing
to accept the environmental service contract. The auction offers the benefit of simultaneously allocating contracts and
revealing an efficient clearing price. This price may be determined by either a budget constraint (a fixed available amount
of money) or a quantity constraint (a target number of contracts) (Schilizzi & Latacz-Lohmann, 2007). 7 Thus, an auction
simultaneously determines who to pay and how much to pay
them.
4. AUCTIONS IN DEVELOPING COUNTRIES
Piloting auctions to allocate conservation contracts in developing countries can help reveal the true benefits and pitfalls of
the approach. The private information revealed by auctions
may be particularly important in developing countries, where
the markets associated with environmental service contracts
may not function well, which exacerbates the information
asymmetry between the landholder and the policy maker.
Where land, labor and credit markets are imperfect, the prices
that these markets reveal are likely to differ from the true
“shadow price” felt by the household, making it difficult for
policy makers to estimate opportunity costs (De Janvry, Fafchamps, & Sadoulet, 1991). In addition, poorly functioning
land markets may create obstacles for the fundamental feasibility of the PES approach. Where private property rights
are poorly defined, individuals may not be able to place bids
involving land that they do not own. In places where land tenure is insecure, changing land use through any contract with
external parties may be illegal and create problems with contract enforcement and payment.
While auctions have been used in environmental policy settings in developed countries in a number of cases, their application to developing countries is recent. The effectiveness of
auctions for improving PES contract allocation may be affected
by several conditions related to participants and context.
(a) Understanding the bidding strategy
Though auctions are regularly used to trade commodities in
developing countries, understanding dominant bidding strategies may be challenging to inexperienced market participants.
A substantial body of literature in experimental economics suggests that experience is important for accurate bidding (e.g.,
3
List, 2003). Because most PES contract allocations are relatively rare, opportunities for participants to gain experience
with a contract auction will be few and far between. In addition,
with long-term land use contracts, trading following an auction
is likely to be disallowed, putting an additional onus on the
accuracy of one-shot bids. While the case studies that we present below do not provide direct evidence on the role of experience or training for auction performance, we are able to show
suggestive evidence that participants understood the auctions
reasonably well. In particular, the Malawi auction benchmarks
bids against acceptance decisions under a simpler “take it or
leave it” price offer market (see also Jack, 2010).
(b) Information asymmetries
For an auction to reveal private information, the bidders
must have better information than the auctioneer (the implementing agency) about their true values. In developing countries, landholders may not have private information for two
reasons. One, if the contracted land use activity is new or unfamiliar, the implementing agency may actually have better
sense of the input requirements of the contract than does the
landholder. In such a case, the landholder will not provide a
better estimate of their true costs than would an estimate provided by the auctioneer. Two, the determinants of opportunity
cost are likely to be highly uncertain. While an auction may
successfully sort landholders on their ex ante estimates of
opportunity cost, these estimates may not be well correlated
with ex post realized opportunity cost. In a setting with highly
uncertain opportunity cost, sorting on ex ante estimates does
little to improve the efficiency of the allocation. 8 We cannot
explicitly test for the importance of ex post shocks to opportunity cost in our settings. However, we can explore the relationship between bids, household characteristics, and compliance
rates as tentative investigation into these factors.
(c) Power imbalance
A common concern about contracts for environmental service provision in developing countries relates to the extreme
power imbalance between the contracting parties. Though
PES contracts are typically structured to be voluntary, with
relatively cheap exit options, contracted landholders may feel
pressure to implement the contract whether or not it provides
them with a surplus above their implementation costs. Sources
of pressure may include expectations of future benefits from
the implementing organization, or pressure from within one’s
own community. These concerns are not unique to the use of
an auction, though in a setting where individuals reveal their
own prices through bids, these types of pressure may lead to
underbidding and a subsequent failure to exit a contract that
is harmful to the landholder. Our tentative evidence from
Indonesia and Malawi shows no indication that participants
deflated their bids, and contract holders exited at a fairly high
rate in Indonesia. These findings are discussed below.
(d) Distributional equity
The distributional consequences of any policy or program
tend to be of particular concern in developing country settings.
A number of authors have raised questions over the distributional equity of PES contracting. For example, Zilberman,
Lipper, and McCarthy (2008) discuss scenarios under which
PES is likely to benefit the poor. Particular concerns are often
voiced for auction or other market-like approaches because
they reduce the size of the transfer going to the landholder.
Please cite this article in press as: Ajayi, O.C. et al. Auction Design for the Private Provision of Public Goods in Developing Countries: Lessons from
Payments for Environmental Services in Malawi and Indonesia, World Development (2012), doi:10.1016/j.worlddev.2011.12.007
4
WORLD DEVELOPMENT
If the program’s sole objective is poverty alleviation, then an
auction is unlikely to be the optimal targeting approach. If,
however, cost effective conservation is the objective, then auction design decisions can help improve poverty alleviation outcomes while still lowering overall program costs. In particular,
if opportunity cost is correlated with wealth and PES contracts
improve landholder welfare, then targeting landholders with
low opportunity cost may also alleviate poverty. However,
without first establishing that PES contracts make landholders
better off, evaluation of the distributional impacts of contract
allocations are premature. We again provide only tentative
evidence on these distributional concerns in our case studies
below.
5. CASE STUDIES: INDONESIA AND MALAWI 9
While auctions have potential to generate cost effective allocations of PES contracts, the gains will depend on their actual
performance. The two cases presented here represent some of
the first examples of implementation of auctions for environmental service contracts in developing country settings. 10
The settings, implementation process and outcomes are described separately, then compared directly in Section 6. The
technical details of these case studies have been described elsewhere (Jack, 2010; Jack et al., 2009; Leimona, 2010). The new
analyses performed here summarize these two case studies and
provide parallel results to facilitate comparisons and identify
generalizable lessons.
(a) Case study 1: erosion mitigation in Indonesia
In upland areas, agricultural practices often generate significant watershed externalities, such as water contamination, siltation of downstream irrigation, or power generation dams.
Adoption of agricultural practices, such as terracing or reductions in fertilizer use come at a private cost to the upstream
farmer but generate downstream benefits. Incentives for upstream farmers to adopt such practices may therefore be necessary to reduce downstream environmental and economic
losses. Where these losses are sufficiently large, downstream
parties may have a substantial willingness to pay.
Coffee farming areas in Southern Sumatra exemplify the watershed degradation caused by intensive upstream agriculture.
In Lampung Province, ICRAF implemented a pilot program
to assess the performance of an auction to allocate incentive
contracts for investments in erosion mitigation practices. Watershed environmental services present a complication for contract allocation because the benefits associated with enrolling
each land parcel in a watershed protection program will depend on its spatial location, slope, and other factors. As described in Engel, Pagiola, and Wunder’s (2008) overview
article, PES programs may differentiate payments on the costs
of environmental service provision, the benefits associated
with those services, or both. Where service benefits are likely
to be heterogeneous, such as with watershed services, incorporating benefits into the allocation process may improve the
overall social benefits from the contracts (Bulte et al., 2008).
The objective of the pilot auction in Sumatra was to test the
auction performance and not necessarily to generate the greatest benefits at the lowest cost, therefore, benefit heterogeneities
were ignored for the purposes of the pilot.
(i) Setting and background data
Substantial background research contributed to the auction
case study implemented in Sumatra. ICRAF researchers
performed a preliminary assessment of the hydrology of the
area to identify key locations for downstream siltation. The
landholdings in two villages were identified as large contributors to erosion, which interferes with operations of a downstream power generation facility. To identify land use
practices acceptable to participating farmers that could mitigate erosion from the coffee farms, ICRAF conducted a number of focus group discussions. Three practices that reduce
erosion without affecting coffee production were identified:
sedimentation pits, contour ridges, and planting grass strips.
Before the full auction was implemented, a number of trials
were conducted to inform auction design decisions. The trials
and methodology have been described in greater detail by Leimona et al. (2010). The first was conducted with Indonesian
university students, involving hypothetical bids for room
cleaning contracts. The second was conducted with farmers
in Sumatra, in villages similar to the final implementation site,
again using hypothetical bids. These two sessions were used to
refine instructions, train enumerators, and decide among alternative auction design parameters.
Parallel to the hypothetical auction trials, ICRAF staff conducted a baseline survey of all households in the designated
environmental service contract villages. Baseline information
on participants is useful for research purposes but is unnecessary for the effectiveness of the auction. A total of 82 coffee
farmers from the two villages participated in the final auction
for environmental services contracts in 2006.
(ii) Contract design
Based on the focus group discussions and consultation with
hydrologists, the contract presented in Table 1 was offered to
auction participants. The contract stipulated fixed amounts of
the three erosion mitigation practices per area. Participants
were able to choose the amount of land to enroll and the contract was scaled to their chosen quantity of land. The land
areas contracted ranged from 0.25 to 2 hectares. Payment
was divided into three installments, the second two of which
were determined by compliance rates. For each of the three
erosion mitigation practices, any participant who had not
completed half of the requirement by the mid-point of the year
received no further payment. All contract recipients were provided with training on implementation of the erosion mitigation practices.
(iii) Auction design and bids
The auction was implemented using a uniform price rule
based on a fixed budget constraint. ICRAF staff explained
the auction rules to the participants and gave them the opportunity to bid for seven nonbinding trial rounds before the final
binding bidding round. During the preliminary rounds, the
budget was used to identify the provisional winners, whose
identification numbers were announced. No information
regarding prices was announced between rounds to avoid spurious bid affiliation (List & Shogren, 1999). The multiple bidding rounds provided participants a chance to become familiar
with the auction procedure and to enhance competition
among the relatively small number of bidders. To mitigate
the potential for collusion, communication among bidders
was discouraged and bidders were seated some distance from
one another.
Figure 1 shows the bid distribution in 10,000 Rupiah
(!1USD = Rp9000). Bids were normalized into per hectare
prices and ranked as shown. The mean bid per hectare was
2.64 million Rupiah or about USD 293. The bid distribution
was very left-skewed, with a median substantially below the
mean at 1.63 million Rupiah or USD 181. Based on the total
Please cite this article in press as: Ajayi, O.C. et al. Auction Design for the Private Provision of Public Goods in Developing Countries: Lessons from
Payments for Environmental Services in Malawi and Indonesia, World Development (2012), doi:10.1016/j.worlddev.2011.12.007
AUCTION DESIGN FOR THE PRIVATE PROVISION OF PUBLIC GOODS
5
Table 1. Contract design, Indonesia
Key item in the contract
Soil conservation activities
Description of the contract item
– Sediment pits: 600 per hectare, standard dimensions
– Ridging: 50% of plot or 1/2 hectare
– Vegetation strips: surrounding pits and ridging
1/3 at inception, 1/3 at mid-point contingent on performance, 1/3 at one year contingent on performance
Payment schedule
Duration and monitoring
– One year with monitoring every three months
– Termination if 50% contracted activities not completed by mid-term monitoring date
Table 2. Baseline characteristic of auction participants, Indonesia
6
7
Number of participants
Number of hectares contracted
Distance from plot to road
Current soil conservation
Slope
History with NGO
82 (34 received contracts)
25
Mean: 25.96
Winners: 79%; losers: 66%
46% of participants on slope >25%
82.9% had past experience with
ICRAF
price
4
5
log bid (10,000 Rp)
8
Cancelation or noncompliance results in ineligibility for second payment installation.
Force majeur provision for contract terms in the event of natural disasters.
0
20
40
60
80
bid rank
Figure 1. Auction bids in (log) Rupiah, Indonesia.
funds available and this bid distribution, the 34 lowest bidders
(41.5% of bidders) received contracts at a price of around
USD 171 for the one-year contract.
(iv) Bid calibration
To calibrate whether the bids received in the auction
approximated opportunity cost, we collected information on
estimated implementation costs from several sources. Because
the contracted erosion mitigation activities have no effect on
coffee production, the primary cost was expected to be driven
by the opportunity cost of labor. The implementation time
associated with the contract was estimated using the baseline
household survey, focus group respondents, and outside agricultural experts. Using market wage rates, estimates of the
contract’s labor costs ranged from 2.03 million Rupiah to
2.70 million Rupiah, which are within the range of the mean
bid. However, they are substantially higher than the median
bid of 1.63 million Rupiah and 30–74% higher than the eventual contract price. The values are consistent with the auction
selecting the lowest cost landholders, though it may also be
that estimates based on wage labor tend to inflate costs for
the reasons discussed in Section 2(b).
(v) Program outcomes
Contracts with 34 of the 82 auction participants resulted in
approximately 25 hectares or 67 acres of erosion mitigation
investments. Baseline characteristics of the auction participants are summarized in Table 2. Many participants were already investing in limited activities related to soil
conservation, more among those who received a contract than
those who did not. The contract rewarded additional
investment only, so the previous soil conservation may have
influenced selection through bids but is unlikely to have influenced compliance costs. Land holdings are steep, on average,
with slopes of greater than 25% gradient for almost half of
participants. Most participants had interacted with ICRAF
in the past, which may have affected both bids and available
information about soil erosion mitigation practices.
Many PES programs attempt to address environmental services while also considering socioeconomic impacts of the program. Using the baseline survey data, we can compare the
selection under the auction to sample averages. Table 3 shows
that contract recipients under auction are better off than the
average landholder in terms of asset holdings (adapted from
Jack et al. (2009)), though the difference is not statistically significant. Landholdings and education levels among recipients
are both very similar to the sample average. These outcomes
potentially suggest some disproportionate enrollment of relatively well off households into the contracts. We discuss the
implications of pro-poor targeting in Section 6.
The primary program objective is, of course, eventual contract outcomes, and compliance with the erosion mitigation
contract determines both the environmental effectiveness of
the program and also the actual payments levels. Compliance
is measured as whether or not the contract holder met the contract requirements by a specified date at the mid-point and end
of the one-year contract. All participants received a third of
the total payment upfront, however, subsequent payments depended on implementation. Table 4 shows the contract compliance outcomes. All households but one were fully
compliant through the mid-term monitoring. However, at
the final monitoring period, compliance rates fell to approximately 56% of households. On average, those who were compliant with the erosion mitigation contract were overcompliant, completing around 133% of the required activities.
Of those who defaulted on the contract, compliance rates were
still well over half, with around 82% of activities completed.
Differences in bids between compliant and noncompliant individuals are not statistically significant, though bids among
compliant individuals were lower.
Please cite this article in press as: Ajayi, O.C. et al. Auction Design for the Private Provision of Public Goods in Developing Countries: Lessons from
Payments for Environmental Services in Malawi and Indonesia, World Development (2012), doi:10.1016/j.worlddev.2011.12.007
6
WORLD DEVELOPMENT
Table 3. Allocation characteristics, Indonesia
Contract recipients
Sample average
11,190
0.74
5.8
8,667
0.83
5.7
Asset (USD)
Area (hectares)
Education (years)
Note: Adapted from Jack et al. (2009).
Table 4. Contract compliance outcomes, Indonesia
N % Households % Activities Mean bid (USD)
Noncompliant 15
Compliant
19
44.12
55.88
81.92
132.68
118
113
(b) Case study 2: tree planting in Malawi
Tree planting on private land generates a number of public
benefits, most prominently carbon sequestration. However,
for many tree species, private benefits are limited and landholders will not internalize the public benefits associated with
tree planting such as carbon sequestration, soil fertility, and
habitat. Emerging carbon markets offer a potential source of
funding for incentive payments to encourage tree planting,
though validation of carbon sequestration at the level of rigor
needed to meet current international standards adds significant transaction costs to program implementation. We continue to focus here on landholder selection into the program,
putting issues of financing and transaction costs aside.
Land use based carbon sequestration is a likely candidate
for selecting landholders based only on opportunity cost,
which can be achieved through a simple auction. To the extent
that no landholder generates significantly greater environmental benefits than any other landholder for a given activity, then
selecting on cost will maximize cost-effectiveness. For example, paying landholders based on surviving trees (or, even
more precisely, based on tree diameter) substantially reduces
the importance of spatial dimensions of environmental benefits.
(i) Setting and background data
The site selection process for the tree planting contracts in
Malawi considered a number of factors related to the expected
opportunity cost of participants. A location in the central region of the country was chosen to balance considerations of
land and labor availability. As described by Jack (2010), within the selected district, 27 villages were identified. All landholders with clear land rights and at least 0.5 acres were
eligible to participate. These eligibility criteria were based on
data collected during a baseline survey of households in the
candidate villages.
The baseline survey and consultation with forestry experts
suggested that the preferred species for the contract would
be a timber species with high carbon storage and economic value maturing after many years of growth. The species identified was an endemic white mahogany, Khaya athotheca,
which grows well in the study area, but is no longer commonly
found. For research purposes, we wished to use a tree type
that would not be readily available on local markets to avoid
contract holders replacing dead trees with new ones purchased
from the market. 11 Using a local species also mitigated the
chances of any kind of invasive or problematic impacts on
the local ecosystem.
A pilot was conducted using similar market mechanisms
as the final experiment in order to pre-test the implementation script and logistics. During the pilot, we purchased
one-day labor contracts to assist with the construction of
a nursery where the seedlings would be stored prior to
distribution. The pilot was used to pre-test the instructions
and train those who would assist with the final implementation. The pilot was small, with only 25 participants, but
incentive compatible, meaning individuals had the same
incentives to bid truthfully that they would have in the
environmental services auction. The final allocation took
place several weeks later and involved 432 individuals from
24 villages.
(ii) Contract design
A three year tree planting contract was offered to all 432
individuals, approximately half of whom participated in an
auction similar to that used in Indonesia. The other half received a “take it or leave it” price offer. The contract over
which individuals bid is described in Table 5. All farmers were
offered the same contract, with a fixed amount of land for tree
planting and a pre-determined number of seedlings. Unlike the
Indonesia erosion mitigation contract, farmers could not scale
the contract to suit their landholdings or other constraints.
While erosion mitigation investments do not disrupt agricultural production, planting trees does. Consequently, a contract of limited size was implemented in Malawi. This
contract design also provides a clearer relationship between
landholder characteristics and contract implementation outcomes.
In this case, ICRAF provided several inputs upfront, to
reduce the effect of liquidity constraints on bids and on
implementation quality. Specifically, the fixed number of
seedlings was distributed to each contract holder at the time
of the correct planting season. All farmers, whether or not
they had received a contract, were invited to join a series
of trainings delivered at appropriate points in the contract
cycle. These upfront inputs leveled some underlying
differences across participants in terms of information and
liquidity, but were of limited value if the landholder did
not intend to participate in the contract and keep the trees
alive.
Unlike the case in Indonesia, no contract payment was
provided upfront and all payment installments were contingent on tree survival. Such a payment structure minimized
the chances that participants would submit low bids to obtain
upfront payments or to retain the option to implement. The
initial stage of contract implementation included high fixed
costs for clearing the field and planting the trees. Contract
holders were given specific instructions on use of a contiguous
area for tree planting, which was intended to facilitate monitoring and to maximize survival. However, similar projects
Table 5. Contract design, Malawi
Tree planting – Clear 1/2 acre of land for tree planting
– Prepare field, dig planting pits
– Plant 50 trees, weed, water and care for trees
Payment
Payments per surviving tree after: 6 months,
schedule
1 year, 2 years, 3 years
Duration and – 3 years with renegotiation option
monitoring
– Monitoring at each payment period
NGO inputs – Seedlings provided upfront
– 3 trainings on field preparation, planting and care
Force majeur provision for contract terms in the event of natural disasters.
Please cite this article in press as: Ajayi, O.C. et al. Auction Design for the Private Provision of Public Goods in Developing Countries: Lessons from
Payments for Environmental Services in Malawi and Indonesia, World Development (2012), doi:10.1016/j.worlddev.2011.12.007
14
(iv) Bid calibration
Like in the Indonesia case, we wished to calibrate the Malawi bids against other estimates of the opportunity cost associated with the contract. To do so, we once again assessed the
value of different inputs to the contract implementation (see
Jack (2010) for greater detail). Market prices for land, labor
and other inputs are used, though the value of these inputs will
differ from market prices in settings where associated markets
are imperfect. Unlike the erosion mitigation contract in Indonesia, the tree planting contract may have affected agricultural
production if trees were planted instead of crops. A household
that faces market prices for all inputs and converts their half
acre of land from crop production bears an opportunity cost
between 107,610 and 418,950 Kwacha over the three years
of the contract, driven largely by foregone income from crops.
A household with idle land would face a much lower opportunity cost according to these estimates, closer to 20,000 Kwacha. While actual opportunity costs are likely to be below
these figures, the mean auction bid falls within this range.
The clearing price was again set below these estimated levels,
reflecting the challenge associated with determining true
opportunity cost from observable data in these settings. Specifically, because land, labor, and other input prices on the
market do not reflect the shadow prices faced by individual
households, these estimates may be over- or under-estimates.
10
12
7
different rates of supply (38% versus 99% of the groups) between the treatments.
8
price
4
6
log bid (kwacha)
AUCTION DESIGN FOR THE PRIVATE PROVISION OF PUBLIC GOODS
0
50
100
150
bid rank
200
250
Figure 2. Auction bids in Kwacha (logs), Malawi.
with less strict research objectives could allow landholders
more flexibility in implementation, which should lower costs
to the landholder since planting trees as wind breaks or to
delineate property may increase private benefits.
(iii) Auction design and bids
The implementation of the auction for tree planting contracts in Malawi used an experimental design to generate
greater insight into the bidding and contract compliance results of the auction. Jack (2010) describes the implementation
and results in greater detail. Participants were randomly assigned to one of two treatments, the first being a uniform
price, sealed bid auction, similar to what was implemented
in the Indonesia case study, and the second being a take it
or leave it price offer, which was run immediately after the auction and used the auction clearing price as the price offer. Contract content and prices were the same for all contract
recipients. The two mechanisms are strategically equivalent,
making the posted price offer market a useful counterfactual
to the auction. 12 Differences in supply and tree survival across
the two mechanisms are informative about the benefits of an
auction relative to more commonly used approaches.
The Malawi auction following the same pricing and bidding
rules as the Indonesia auction, though only a single practice
round preceded the final bidding round. The number of participants in the Malawi auction was much greater than the number of bidders in the Indonesia auction. Theoretically, the
number of bidders does not affect the dominant bidding strategy in a second price auction. However, in a number of other
auction formats, increasing the number of participants decreases bid shading and increases competition. If participants
remained unsure of the bidding strategy, a larger number of
bidders should help to reduce strategic behavior.
Figure 2 shows the distribution of bids in Malawi Kwacha,
with the vertical axis in logarithm units. The clearing price is
shown, which fell at 12,000 Kwacha or about 80USD
(1USD = 150 Kwacha) for the full three years of the contract.
Actual payments depend on tree survival rates. About 40% of
bidders received a contract at this price (those below the price
line in Figure 2). The mean bid was around 58,000 Kwacha
with a median bid of 20,000 Kwacha. When individuals in
the posted price offer treatment were offered the price of
12,000 Kwacha, 99% accepted it. In the auction treatment,
86 individuals or about 38% of the market received a contract.
In Section 5(b)(v) we discuss the implications of the highly
(v) Program outcomes
Contracts with 176 individuals yielded 8,800 trees planted
in Central Malawi. In the posted offer group, a lottery was
used to allocate contracts after the high sign up rates overspent the budget. The total number of contracts awarded to
individuals in that treatment is similar to the total number
awarded under the auction. Baseline characteristics of all
participants, and those who received a contract are shown
in Table 6.
Table 6 also allows for some comparisons of the distributional consequences of the program. Like with Table 3, we
can compare socioeconomic indicators for those who received
contracts with those who did not. Overall, individuals with a
history of interaction with the NGO were slightly more likely
to receive a contract through the auction (p < 0.10). Household sizes are larger for contract recipients than nonrecipients
(p < 0.10). Households that receive a contract under the auction have more months of food shortage and fewer hectares
of land than the sample average. Months of food shortage is
a proxy for the well-being of a household in this environment. 13
Table 6. Socioeconomic characteristics, Malawi
Contract recipients
Number of participants
Number of contracts awarded
Current tree planting
History with NGO
Household size
Months of food shortage
Female headed HH
Total acreage
Education
Auction
Posted Offer
228
86
0.52
0.39
4.92
4.67
0.21
3.71
2.17
205
91 (lottery)
0.53
0.29
4.72
4.09
0.23
5.73
2.38
Sample
average
0.49
0.29
4.58
4.19
0.22
4.33
2.24
Please cite this article in press as: Ajayi, O.C. et al. Auction Design for the Private Provision of Public Goods in Developing Countries: Lessons from
Payments for Environmental Services in Malawi and Indonesia, World Development (2012), doi:10.1016/j.worlddev.2011.12.007
8
WORLD DEVELOPMENT
Table 7. Environmental outcomes (out of 50 trees), Malawi
Tree survival (6 months)
Auction treatment
Tree survival (1 year)
N
Mean
Min
Max
171
82
171
40.6
42.5
32.4
3
16
0
50
50
50
Overall, households that received a contract under the auction tend to be slightly worse off than the sample average.
Thus, it appears that in the Malawi setting, contract recipients
were slightly less wealthy than the average household, particularly when considering only allocation under the auction.
An assessment of the livelihood impacts of implementing a
contract is therefore important to determine whether such a
distribution pattern is desirable from an equity standpoint.
If contracts make landholders better off, then allocation to
the relatively poorer households may help achieve ancillary
poverty alleviation objectives.
Though contracts are ongoing, analyzing results from the
first two monitoring periods offers some insights into the environmental effectiveness of the program. The primary environmental outcome of interest is the number of surviving trees,
which is presented in Table 7. On average, 80% of trees survive
the first six months of the contract. This number drops to 65%
after the first year. However, underlying this number is a wide
variation in tree survival. Through the first year of the contract, some landholders keep all trees alive, while others have
very poor performance. The total number of contract holders
presented in Table 7 is lower than the original number of
recipients. Due to various events, five people quit the program
in the first six months, only one of whom did not ever plant the
trees.
6. CASE STUDY COMPARISONS AND IMPLICATIONS
While the auction designs implemented in Indonesia and
Malawi were similar, the context of implementation and the
content of the PES contracts allocated were very different. A
systematic comparison of similarities, differences, and results
can help suggest areas where future research is most urgently
needed, and also consolidate current available information
for those wishing to implement conservation auctions of their
own. Throughout this section, we raise open questions that the
two case studies cannot resolve. We also return to the potential concerns surrounding auctions in developing country contexts, which were presented in Section 4: (a) understanding the
bidding strategy, (b) information asymmetries, (c) power
imbalance, and (d) distributional equity.
(a) Comparison of implementation and context
Both auctions used a uniform price, sealed bid auction format, with the clearing price determined by the first rejected
bid, which makes truth-telling a dominant strategy. In Indonesia, participants were given a chance to gain experience with
the mechanism through seven trial or learning rounds that preceded the final allocation round. With repetition, bids fell on
average, lowering the clearing price in the auction. Whether
the final-round price was better for overall program outcomes
than the first-round price is difficult to determine without
observing contract performance for both groups. Among auction participants who received a contract, those who would
have received one had the first round been binding did slightly
but insignificantly better in compliance terms than did contract recipients who would not have received a contract in
the first round. This difference is a function both of changes
in selection and changes in the clearing price over the bidding
rounds. Future implementation of PES programs in developing countries, preferably using an experimental design, is
needed to assess the benefits of repeated bidding sessions.
The effect of multiple bidding rounds raises issues of participant understanding of the mechanism. The comparison of the
auction and the posted price offer compliance outcomes from
the case study in Malawi give us the clearest indication of
whether participants understood the auction. Compliance under the auction was significantly higher than compliance under
the posted price offer treatment. This indicates that the auction
had sorting power, which implies that participants must have
understood the bidding incentives to at least some extent.
What is relatively more surprising about the findings from that
study is that the posted offer treatment appears to be associated with less understanding of the market mechanism’s implications. A survey measure collected after the auction
implementation provides further evidence on the relationship
between participant understanding and bidding behavior. A
psychological measure of cognitive ability was collected using
a reverse digit span test, which measures ability to abstractly
manipulate numbers. The resulting score was only weakly correlated, both linearly and nonlinearly, with bids. This suggests
that there was no systematic relationship between how
“smart” an individual is and his or her ability to formulate a
bid.
Another important difference between the two case studies
lies in the contract, both in terms of the costs it imposes on
the landholder and the incentives it offers. First, the erosion
mitigation contract in Indonesia consisted primarily of labor
inputs and had no direct impact on production, beyond the
costs of labor diverted away from coffee production. In Malawi, the use of the land for tree growing implied an impact on
production for landholders without surplus landholdings.
Individuals were given the option of intercropping with the
trees to minimize the effects on production. These differences
in the contracted activities are consistent with a greater heterogeneity in opportunity cost in the Malawi case. In both cases,
land holders perceived some private benefits associated with
the contract activities, such as improved soil fertility. Second,
the contract payments in Indonesia are conditional on the
completion of particular activities that are associated with
reducing erosion, such as terracing. In Malawi, the contract
payments are conditional on tree survival outcomes. As Zabel
and Roe (2009) discuss, placing PES incentives on actions or
on outcomes trades off risk sharing with incentives: paying
for actions reduces the risk borne by the landholder, but distorts incentives away from the socially desired outcome.
Comparisons across the cases are complicated by the differences in the incentives delivered by the contracts. In Indonesia,
a threshold incentive was delivered with two thresholds determining payments, the first at the mid-point (6 months) and the
second after a year. Thus payments were all-or-nothing at
both of these evaluation points, with a discontinuous incentive
for effort around the thresholds. Such a contract structure is
inefficient relative to the marginal performance incentives
delivered by the Malawi tree planting contract, which rewarded contract holders on the margin (per surviving tree).
Threshold incentives place additional risk on the landholder
and deliver no incentive to exert effort beyond the amount required to achieve the threshold. The Indonesia contract also
delivered a third of the payment upfront. While an upfront
payment may be necessary to alleviate liquidity constraints,
Please cite this article in press as: Ajayi, O.C. et al. Auction Design for the Private Provision of Public Goods in Developing Countries: Lessons from
Payments for Environmental Services in Malawi and Indonesia, World Development (2012), doi:10.1016/j.worlddev.2011.12.007
AUCTION DESIGN FOR THE PRIVATE PROVISION OF PUBLIC GOODS
9
some minimal input or effort requirement to obtain a payment
can help reduce enrollment by landholders with no intention
of completing the contract. Provision of in-kind inputs for
contract implementation may address the liquidity constraint
concern without generating excess sign-up.
The contracts allocated under the case studies also differ in
their length. The Indonesia contract lasted only for one year,
thus covering only one agricultural cycle. As opportunity cost
fluctuates with agricultural seasons, compliance patterns are
also likely to vary. In Malawi, where the contracts last for
three years, we may be able to observe more about opportunity cost fluctuations, though the measured outcome of tree
survival is a cumulative measure of all prior shocks. The
length of these contracts was designed with the particular
investment that they require in mind. While the erosion mitigation investments in Indonesia require some maintenance,
they are fairly durable. Consequently, paying for their construction is likely to result in a stream of future environmental
benefits. Similarly, in Malawi, the primary costs to establishing trees accrue during the first few years of growth. Beyond
that point, the trees will be established enough to survive with
only minimal additional investment. While both land use
activities do have ongoing costs beyond the period of the contract, these longer term costs are very small compared to the
costs covered during the contract.
implementation, default rates were around 40%. This second
period of the contract coincided with the coffee harvest, which
was better than previous years, both in terms of prices and
yields. Consequently the higher opportunity cost of implementation once coffee profits were known may have contributed to
high default rates. The compliance patterns in Indonesia suggest an additional issue with auction bidding, which is that
individuals treat the conservation contract as an option contract. With uncertainty about future income opportunities,
individuals may accept a contract price that is too low for a
good state of the world but that is a supplement to income
in a bad state of the world. Then, after the uncertainty is resolved (when harvest time arrives, for example), landholders
decide to comply if other income is bad or to default if other
income is good. The structure of costs under the Malawi tree
planting contracts makes this an unlikely explanation for results in that case. High fixed costs at the start of the contract
and the lack of upfront cash payments makes the option value
of the contract exceedingly low. Where option value may present a challenge to compliance, an incentive scheme that considers these fluctuations in costs may be able to reduce
default relative to a static contract.
(b) Comparison of bidding and compliance results
In Section 4, we outlined a number of potential issues for the
implementation of conservation auctions in developing countries. First, as discussed, results from Indonesia and Malawi appear as if understanding of the auctions was sufficiently high to
reveal private information (see also Jack, 2009, 2010). Second,
we raised the concern that ex ante expectations of opportunity
cost might be poor predictors of ex post opportunity cost. Low
compliance rates in Indonesia are consistent with this concern.
However, if instead of binary measures of compliance, we look
at a continuous measure of implementation, then the picture is
less stark. Even noncompliant individuals in the Indonesia case
study completed, on average, over 80% of the contract. Better
measures of ex post shocks and their effect on compliance have
implications for contract design and allocation.
Third, another concern described above relates to power
structures and social pressure. Our results do not offer clear
evidence on how important these factors were in either bidding
behavior or compliance results. In the Indonesia case, the relatively high default rates close to the end of the contract period are not what we would expect if individual compliance
decisions were influenced by power structures. In both cases,
an effort was made to emphasize the voluntary nature of the
contracts and the ability to exit at any point without incurring
any penalty aside from foregone future payment. Neither case
varies the power structure systematically, making it difficult to
hypothesize about the importance of these factors.
Fourth, we discussed the distributional implications of allocation based on cost rather than some explicit equity criteria.
As stated above, much of the concern with distributional equity in PES programs assumes that the contracts make individuals better off. While this may be the case, little empirical
evidence is available to support the claim. The structure of
the price setting mechanism and follow up qualitative interviews suggest that individuals are receiving a surplus above
their true minimum willingness to accept. A follow up survey
is planned for program participants in Malawi, with the intention of measuring impacts of the contract on recipients. All
PES programs should take steps to evaluate livelihood impacts, preferably with clean evaluation methods that measure
impacts against a no-PES counterfactual.
Turning to the results in both of the case studies, we observe
around 40% of bidders receiving contracts in both settings
(41% in Indonesia and 38% in Malawi). We also observe a
steeper than exponential distribution of bids in both settings,
with greater variability in bids at the top end of the distribution. Direct comparison of prices is meaningless given the differences in wealth levels and in the requirements of the
contracts. Calibration of auction bids to accounting style estimates of opportunity cost suggests an interesting regularity
across the settings. In both cases, the calculation of opportunity cost using market prices brackets the mean bid. Several
possible interpretations of this result present themselves. First,
individuals may be bidding accurately and opportunity costs
may vary above and below the market value of contract implementation due to shadow prices on land, labor, and other inputs. Alternatively, bidders may be using a similar approach
to calculating opportunity cost—adding up land, labor, and
other input expenses at market values—and benchmarking
bids to that value.
In terms of contract compliance, both contracts show a decline in compliance over time, though likely for different reasons. In Malawi, compliance measured by tree survival
shows a steady decline over the course of the contract. Some
death rate for newly planted seedlings is expected, and the
fairly steady decline in survival may be attributed to natural
patterns in addition to landholder effort. In the case of tree
survival, effort costs will also vary with the agricultural season,
with the most difficult survival period coming between months
6 and 12, when farmers must water the seedlings manually.
Continued monitoring through the end of the contract may offer additional insights. While the environmental benefits
resulting from the programs have not been fully quantified
(see Jack (2010) for an estimate of projected carbon sequestration in Malawi), the small scale of the pilot programs makes it
unlikely that they would generate meaningful changes in environmental services.
In Indonesia, compliance rates were high through the midpoint of the contract. During the final six months of contract
(c) Implications for the future use of auctions in developing
countries
Please cite this article in press as: Ajayi, O.C. et al. Auction Design for the Private Provision of Public Goods in Developing Countries: Lessons from
Payments for Environmental Services in Malawi and Indonesia, World Development (2012), doi:10.1016/j.worlddev.2011.12.007
10
WORLD DEVELOPMENT
We presented simplified comparisons of socioeconomic indicators between those who received contracts and those who
did not for each of the cases. In both settings, distributional
patterns were weak. On some measures, contract recipients
appeared to be slightly better off in the Indonesia case and
worse off in the Malawi case than the average household in
both settings. Thus, if contracts truly do make households
better off, then the Indonesia allocation may have been very
slightly regressive while the Malawi allocation may have been
slightly progressive. The results are weak, both in terms of
statistical significance and magnitude. Distributional concerns
do not appear to be a major factor in either of the cases presented.
7. CONCLUSION AND POLICY IMPLICATIONS
Auctions present a promising tool for allocating conservation contracts in settings where opportunity costs are difficult
to observe. However, evidence on their performance in developing country settings is scarce. Here we summarize two early
applications, both implemented by the World Agroforestry
Centre (ICRAF), one in Indonesia, and one in Malawi. Findings suggest that auctions may be useful for sorting individuals
by opportunity cost, but that market mechanisms may perform in nonstandard ways in these settings, making piloting
particularly valuable. These results may be due to participant
understanding of the mechanism, to the difficulties in evaluating opportunity cost, or to the prevalence of ex post shocks is
an open question.
The case studies and discussions presented above suggest a
few clear ways forward for the implementation of auctions
in developing countries. First, more research is clearly needed
to better understand the benefits of such an approach relative
to alternatives, and to develop further practical guidance on
the specific contexts in which auctions are most likely to succeed. Section 4 outlines a number of conditions that, according to theory, will affect the benefits of an auction approach
to contract allocation. Further evidence on their practical relevance is needed. Second, experience and understanding are
likely to be important and market mechanisms may not perform as expected in developing country settings. While the
experiment in Malawi clearly demonstrates that different
mechanisms may offer tradeoffs along quantity–quality lines,
none of our results can speak to the price sensitivity of compliance outcomes. Under a given allocation of contracts, the relationship between contract prices and contract outcomes is an
empirical one that deserves further investigation. For each
case, we observe responses to a single price point. Experimentation with how supply and compliance respond to different
contract prices has the potential to improve how future PES
programs allocate contracts and set contract prices.
NOTES
1. The Katoomba Group (http://www.katoombagroup.org) attempts to
provide inventories of PES programs and potential in countries around
the world.
2. Throughout the article, the emphasis is on targeting landholders with
the lowest opportunity cost of supplying environmental services. While the
benefits associated with the supply of environmental services may also
vary across landholders, these are typically not a large source of
information asymmetry between the landholder and the implementing
organization. Ferraro (2008) provides a discussion of how benefit
measures can be incorporated into auction design. Explicit targeting on
environmental benefits is most important where the correlation between
environmental benefits and opportunity cost is low.
3. Payments may also have a number of unintended effects. By
changing the prices on certain activities, PES programs may create
spillovers that include greater environmental degradation in nearby, but
uncontracted, areas. This phenomenon is commonly referred to ask
leakage (for relevant discussion, see Pattanayak, Wunder, & Ferraro,
2010). On the other hand, payments may generate positive spillovers if
they, for example, convey information about the value of the
environmental service generating activity (Ajayi, Akinnifesi, Sileshi,
Chakeredza, & Mgomba, 2009).
4. Reverse auction” is a term that has been adopted by many PES
practitioners. Referring to these types of auctions as procurement auctions
is more consistent with the economics literature. The environmental
service buyer is procuring service provision from the landholders.
5. Theoretically, the bidding incentives are the same as for an English
(open outcry, ascending) auction.
6. An alternative to a uniform pricing rule is a discriminatory pricing
rule. A second price scoring rule in which each winning bidder is paid the
price of the next lowest bidder preserves incentive compatibility. A
discriminatory price rule has the advantage of transferring less surplus to
the bidders, improving the cost effectiveness of the allocation.
7. Theoretically, both approaches result in incentive compatible bidding,
except in the case of a nonbinding budget constraint. Schilizzi and LataczLohmann (2007) offer further discussion of these alternative constraints.
8. The problem of allocation when opportunity costs are uncertain is not
unique to auctions. Fixed price programs may suffer from the same
challenge of low compliance when ex post costs differ from ex ante
estimates.
9. All data in this section are presented in other publications, though the
discussion here is original. New analyses are, in some cases, undertaken to
improve the comparability of the two case studies.
10. To the best of our knowledge, the Indonesia case study was the first
such implementation. The Malawi case study was implemented around the
same time as another auction for environmental service contracts
implemented by Rohit Jindal in Tanzania. The Malawi case study is the
only one of these that employs an experimental design to evaluate the
auction performance relative to an alternative mechanism.
11. This type of behavior would only be anticipated should the contract
value place an incentive on surviving seedlings higher than the cost of a
replacement seedling. Because the contract price would be set after
determining the contract content, we chose to mitigate the risk of this
outcome by choosing a species not available in local markets.
Please cite this article in press as: Ajayi, O.C. et al. Auction Design for the Private Provision of Public Goods in Developing Countries: Lessons from
Payments for Environmental Services in Malawi and Indonesia, World Development (2012), doi:10.1016/j.worlddev.2011.12.007
AUCTION DESIGN FOR THE PRIVATE PROVISION OF PUBLIC GOODS
12. The approach used in the Malawi case study is an example of
randomized field experiment methodology applied to conservation
programs. While such approaches are increasingly used in health and
other development fields, they are less frequently used for environmental
and conservation applications (Ferraro, 2009).
11
13. The prevalence of food aid programs in Malawi makes measures of
food shortage an imperfect indicator of economic well being. In our
sample, months of food shortage is negatively correlated with both
educational attainment and production of cash crops, two positive
indicators of socioeconomic well being.
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Please cite this article in press as: Ajayi, O.C. et al. Auction Design for the Private Provision of Public Goods in Developing Countries: Lessons from
Payments for Environmental Services in Malawi and Indonesia, World Development (2012), doi:10.1016/j.worlddev.2011.12.007