Technische Universität München
Conservation auctions:
Should information on environmental benefits
be made public?
Thilo Glebe
Technische Universität München
Auctioning of conservation contracts
Environmental effects
Soil quality
Water quality
Biodiversity
Air quality
Example: CRP (US)
sign up 1-9: No EBI
10-14:
EBI (Information concealed)
> 15:
EBI (Information disclosed)
2
Research question
Should the government reveal information on site-specific
environmental benefits?
Cason et al. (2003): Experimental results suggest that concealing information
on EBI can enhance budgetary cost-effectiveness
How can we explain that?
How can we model two-dimensional bid scoring?
3
One-dimesional bid scoring
Latacz-Lohmann & Hamsvoort (1997)
• Bidders maximise expected information rents
• Exogenous expectations of the bid cap
100%
Probability of bid acceptance
90%
Probability
Probability
20%
0%
Expected
Expected
rent
rent
Costs
BidBid
200
€
Information rent
Bid (€)
600 €
4
Governmental objective function
Governments pay for environmental quality
Objectives
• High environmental quality
• Low budgetary costs
5
Modelling conservation auctions
Two-dimensional bid scoring
Assumption
– Government
Bid score relates
maximises
environmental
budgetary
score
cost-effectiveness
(EBI) to budgetary costs
– No correlation between costs and EBI
Bid score:
EBI/bid
EBI /ha
Auction performance
∑EBI
Accepted bids
Indifference
curve
Two-dimensional
bid score
One-dimensional
bid score
Value of information
Bid (€/ha)
Bid cap
Budget (€)
6
Which information policy is more cost-effective?
Participation of 100%
Concealing information on environmental score leads to higher
level of cost-effectiveness
Auction performance
EBI/ha
Bid without
information
Bid with
Information
Costs
Bids (€/ha)
Bid
Indifference
∑ EBI curve
Without
Information
With Information
Budget (€)
7
Which information policy is more cost-effective?
Information disclosure can enhance participation
Bidders with high environmental scores (& costs) can be
motivated to start participating in the auction
Information disclosure can be more cost-effective in case of
high acceptance rates
Expected bid score:
lower boundary
EBI/ha
Bid with
information
Expected
environmental score
Bmax Costs/ha
Maximal bid
Bid (€/ha)
Auction performance
∑ EBI
With information
Without
Information
Budget (€)
8
How relevant is the choice of information policy?
Monte Carlo simulation
Opportunity costs: 100-400 €/ha (triangle distribution)
Uniform distribution of EBI and expected minimal bid score
100%
Information
disclosure is
cost-effective
acceptance rate (%)
90%
80%
70%
60%
50%
40%
Information
concealment is costeffective
30%
20%
10%
0%
0%
20%
40%
60%
80%
participation rate (%)
100%
9
Conclusions
What are policy relevant participation rates?
100%
acceptance rate (%)
90%
80%
Uniform cost
distribution
70%
60%
US Conservation reserve program
Sign up 1
Sign up 2
Sign up 3
Sign up 13
Sign up 15
Sign up 33
50%
EcoTender (Australien)
Pilot auction
40%
30%
Normal cost
distribution
20%
10%
0%
0%
20%
40%
60%
80%
100%
Experimental study
(Cason et al. 2003)
participation rate (%)
10
Summary
• Information concealment is usually cost-effective in
case of high participation rates
– Theoretical explanation for Cason et al.‘s (2003) experimental results
• Information disclosure can be superior if it enhances
the participation rate
– This is more likely to happen the lower the participation rate and the
higher the acceptance rate
11
Thank you for your attention!
13
Noisy information
When there is noise in information
… participation will be lower
… but „attractive“ bids will not become as expensive
when compared to complete information
EBI/ha
Bid with
noisy
information
Expected bid score:
lower boundary
Bid with
complete
information
EBI0
Expected
environmental score
Costs
Bid (€/ha)
Auction performance
∑ EBI
Complete information
Noisy information
No information
Budget (€)
14
How relevant is the choice of information policy?
Small variation of the acceptance-/participation rate can lead to
strong budgetary cost savings, when the „superior“ information
policy is chosen
Acceptance rate (%)
100%
Information
disclosure is
cost-effective
90%
80%
70%
+10%
+10%
60%
50%
40%
Information
concealment is costeffective
30%
20%
10%
0%
0%
20%
40%
60%
80%
100%
Participationsrate (%)
15
Conservation Reserve Program (USA)
US-CRP: Bid scoring index (Signup 26; 2003)
16
BushTender (Australia)
Bid Scoring index: “Biodiversity Benefit Index”
BBI =
Biodiversity Significance Score × Habitat Services Score
Costs announced by landholder
Farmers were not informed about BSS
17
Technische Universität München
Glebe, T. (2013). Conservation Auctions: Should Information about
Environmental Benefits Be Made Public? American Journal of Agricultural
Economics 95(3): 590-605