Center for Development Research
University of Bonn
ZEF Bonn
Specific Challenges of Conservation Auctions in
Developing Countries
Tobias Wünscher (ZEF)
tobias.wuenscher@uni-bonn.de
Workshop
“Conservation Tenders in Developed and Developing Countries - Status Quo, Challenges and Prospects”
Boppard, Germany, September 11-14
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Center for Development Research
University of Bonn
ZEF Bonn
Objective
Identify challenges that are specific to the implementation of
conservation tenders in developing countries
Discuss to some extent how some of them can be dealt with
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Center for Development Research
University of Bonn
ZEF Bonn
Motivation
1. Growth of PES schemes in developing countries
disproportionately high
2. Urgency for effective use of scarce financial funds may be even
more important in developing countries, providing an argument
for application of mechanisms that can raise cost-effectiveness
o when trade-off between basic state services and ES
o ES buyers can be poor
o Counter-motivation: co-objective to enhance income of
landholders more pronounced in developing countries.
o ES providers one of several stakeholders
3. There may be significant differences in design requirements
and/or success of conservation tenders between countries due
to differences in key characteristics.
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Practical Approach
o Outline implementation steps of an auction.
o For each step, evaluate the potential influence of criteria in which
developing countries typically differ from developed countries.
Main sources
 B. K. Jack, B. Leimona, and P. Ferraro 2008. A Revealed Preference Approach to
Estimating Supply Curves for ecosystem Services: Use of Auctions to Set
Payments for Soil Erosion Control in Indonesia. Conservation Biology 23(2): 359367
 O.C. Ajayi, B. Kelsey Jack and B. Leimona 2011. Auction Design for the Private
Provision of Public Goods in Developing Countries: Lessons from Payments for
Environmental Services in Malawi and Indonesia. World Development 40(6):
1213-1223.
 Other papers which are based on the field pilots in Malawi and Indonesia
 Own auction trials in Kenya
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Focus on auction, not on PES
There are many challenges which equally apply to standard and
tendered PES, and which are not part of this evaluation.
Examples are:
o Tenure insecurity
o Corruption and paper-only contracts
o Making transfers
o Moral hazard due to lax enforcement
o Cultural diversity
o Measuring, scoring, valuing ES
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Poverty alleviation and equity
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University of Bonn
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Poverty alleviation and equity
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Poverty alleviation and equity
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PES implementation
steps
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Variables with typical differences
Institutions
o Institutional capacity
o Market orientation (self-sufficiency, monetary based commerce)
o Market imperfections
Natural environment
o Weather variability
Infrastructure
o Communication infrastructure
o Other Infrastructure (roads, etc.)
Human capital
o Education level
Governance
o Corruption
Cultural aspects
o Community integration vs. Individualism
o Punctuality
o Cultural diversity
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Auction Design
o Auction design not trivial
o Multitude of design features and combinations and effects not
always clear.
o Off-the-shelf designs not yet available
o Good design requires the right skills
o Availability of ‚auction‘ skills probably scarcer in developing
countries posing a potential constraint to auction design.
 Can negatively affect use of auctions
 International exchange can help overcome this constraint,
independent of development status of countries.
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Informing eligible population
Information channels
o Letters
o Newspapers
o Brochures
o Internet
o TV
o Radio
o Personal (individual or workshops)
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Center for Development Research
University of Bonn
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Informing eligible population
Information channels
o Letters
o Newspapers
o Brochures
Not feasible in many
developing countries
o Internet
o TV
o Radio
Limits on level of complexity that can be conveyed
o Personal (individual or workshops)
high transaction costs
o Pilots
Equally applies to standard and tendered PES
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Inform eligible population
o Information for an auction PES more complex than that of standard PES
 Compared to workshops for standard PES, workshops for auction
PES may have to be smaller and longer (to get complex information
across)  increase of transaction costs
 Limits on total number of potential participants that can be informed
 Scale of PES schemes in developing countries, and that with
auctions in particular, may stay below those in developed countries
and cause associated efficiency losses.
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Inform eligible population
Educational level of landholders
o Does educational level affect comprehension?
o If it does it could curtail the success of the auction in terms of costeffectiveness (understanding the procedure is pre-requisite for auction to
work)
o In extreme case: potential participants could be excluded from bidding.
This, however, could affect the least educated (possibly the poorest).
However, practical experience suggests that comprehension is not a
major issue
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Bid Formulation
o Dominant bidding strategy in a uniform auction: bid = WTA
o Dominant bidding strategy in a discriminative auction: bid = WTA + S
o Decision in fixed price offer: ϱ=1 if P>WTA and ϱ=0 otherwise
 WTA is central piece of information in all approaches
 Bidding in a uniform auction not more difficult than a yes/no decision for a
fixed price offer.
 Bidding in a discriminative auction slightly more demanding.
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Bid Formulation
Is it harder in a developing country to estimate one‘s WTA?
Yes, it may be, due to higher levels of:
o market imperfections
o subsistence farming
o Uncertainty with respect to prices, yields
 These circumstances affect auction efficiency in two opposing ways:
1. Auctions helpful because the above issues make it harder for the
conservation agency to estimate true costs
2. Auctions face challenge because landholders have the same problem
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Bid Formulation
If landholders in developing countries find it harder to estimate their WTA
Then it would be desirable to provide incentives for increased effort to make
the best out of available information.
Is it possible that effort differs between fixed price offer and auction?
Hypotheses
Auction: instills more careful consideration of responsibilities and actions,
benefits and costs
Fixed-price offer: response rather intuitive, relies on heuristics, without
same detail
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Bid Formulation
There is some evidence that this may be true. Kelsey found compliance to be
higher for contractors who participated in auctions compared to contractors
who were offered take-it-or-leave-it contracts.
 Auctions may be an incentive to do better in estimating WTA with available
information.
 The principal would apply equally in developed and developing countries
but the benefit could be greater in developing countries with larger
information gaps
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Bid Formulation
Formulating S
 Surplus increases with S
 Probability to be selected (p) decreases with S
 Optimal level for risk neutral bidders is where S*p(S) largest
p(S) also depends on things like:
 size of budget
 Bid caps
 Selection criteria
 Number of bidders
 Other agent‘s costs
Better known in developed countries?
Could lead to more strategic bidding on S
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Bid Formulation
 So p(S) can be partly estimated, but part remains uncertain.
 Dealing with uncertainty to great extend a matter of risk preference
 Risk aversity believed to increase with poverty
 bids in developing countries possibly lower with lower relative surpluses
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Bid Formulation
Collusion
Higher risk of collusion, due to:
1. Likely constrained scale of auction PES in developing countries
2. High integration of communities and strong influence of communal
leaders
 In this case it may make sense to switch to group contracts
Collusion so far not observed to my knowledge
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Bidding
Simplest case of one-shot auction
 Bidding does not add complexity compared to a standard PES scheme
provided there is some selection procedure
 Only difference: bid levels are considered in addition to other selection
criteria
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Bidding
Prevalence of bargaining in economies of developing countries and
communication challenges may call for designs with multiple rounds
Multiple rounds resemble bargaining economy more closely and give
opportunity to learn
But multiple rounds pose logistical challenges
Approaches to implement multiple rounds
 Internet
 Surface mail
Not feasible in developing countries
 Mobile phones
High potential but with limitations
 Auction hall
Most likely but logistically challenging for
high numbers
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Bidding
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Select candidates
A discriminative auction may help to reduce the problem that a corrupted
system favors contracts of certain people:
 Higher bids make it more difficult to be accepted by corrupt officials in the
selection process (bid level is a relatively clear signal)
 low bids are not attractive for the bidder.
 This advantage may decrease though with the use of a more complex
selection algorithms which can decrease transparency.
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Other point
Power imbalance: people may feel pressured to bid low and not leave a
harmful contract (community pressure, hope that agency will bring future
benefits). (Ajayi et al. 2011)
e.g. anecdotal evidence of compulsory bids in China
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Center for Development Research
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Summary
Possible effect
CE
Auction design
Availability of related skills low Lower availability leads to less effective designs
(-)
Typical characteristics in
developing countries
Informing bidders
Communication infrastructure
and education level low,
illiteracy high
Bid formulation
Market imperfection more
severe, higher levels of
subsistence and variability in
prices and yields
Landholders more risk averse
Need for workshops, higher transaction costs, scaling up difficult. Low
comprehension may further exacerbate due to smaller size of
workshops and longer duration. If comprehension correlated with
poverty may lead to exclusion of the poor.
(-)
More uncertainty of bidders to estimate true WTA
More uncertainty of conservation agency to estimate WTA
(-)
(+)
Lower surpluses in discriminative auctions
(+)
Poor availability of information Less strategic bidding
(+)
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Center for Development Research
University of Bonn
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Summary
Typical characteristics in
developing countries
Bid formulation (continued)
High levels of community
integration
Possible effect
CE
Increased risk of collusion
(-)
Poor availability of information If auction acts as an incentive to better deal with information scarcity
the positive effect could be higher in developing country where
information gap is larger
Bidding
Poor communication and
physical infrastructure
Bargaining economy
Punctuality less common
Constraints do not affect auction as such but reduce scalability which
can increase transaction costs, limit competition, both with negative
effects on cost-effectiveness
(+)
(-)
Need for multiple rounds. Increase of transaction costs. Limits on scale (-)
Increases difficulty to organize bidding for large groups
(-)
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Center for Development Research
University of Bonn
ZEF Bonn
Conclusion
Some of the typical characteristics in developing countries could
potentially affect the design, implementation and success of auctions
in developing countries.
Some of these effects are positive and some of them negative.
Is the outcome of such differences simply another performance or
get reflected in other designs (e.g. multiple rounds vs. one shot), also
because smaller scales may offer the opportunity to do so?
Understanding overall effects probably requires more field
experience
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Center for Development Research
University of Bonn
ZEF Bonn
Thank you
Tobias Wünscher (ZEF)
tobias.wuenscher@uni-bonn.de
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