Too Burdensome to Bid: Transaction Costs and Pay‐for‐Performance Conservation

Abstract

The authors thank Todd Redder, Chelsie Boles, and Joe DePinto at Limnotech for support with biophysical modeling to predict phosphorus runoff abatement. John Kerr, Cloé Garnache, and Carson Reeling offered suggestions and insights that greatly improved this article. Jason Roehrig (Defiance County SWCD) and Kim Bowles (Fulton County SWCD) were instrumental in conducting the Tiffin Watershed BMP Auctions. We thank the land managers who participated in the Tiffin Watershed BMP Auctions and those who completed the follow-up questionnaire. We also thank Erin Wenk and Kaylee Zajac for help with data input.

Identifying the Causes of Low Participation Rates in Conservation Tenders

“…A common feature of many conservation tenders seems to be low participation rates of potential bidders, defined as the ratio of actual bidders to the pool of eligible bidders, with implications on both efficiency and effectiveness 1 (Windle and Rolfe., 2008, Morrison et al, 2011, DePiper., 2015, Palm-Forster et al, 2016a,b, Motallebi et al, 2016. While low participation rates have also been identified with broader agri-environmental and payment-for-ecosystem service schemes (Defrancesco et al, 2008, Haynes et al, 2007, Mettepenningen et al, 2011, Taylor and Van Grieken, 2015, the comparative rates for conservation tenders appear to be lower (Jack 2013;Palm-Forster et al 2016a,b).…”

“…However, participation rates in conservation tenders are often not reported in the literature, meaning that this potential limitation of conservation tenders is largely hidden from view. Since tenders rely on competition among bidders for a limited budget, an implication of low participation is that the efficiency of conservation tenders may be called into question because higher cost projects are more likely to be funded and program budgets may not be fully allocated (Palm-Forster et al 2016a). Furthermore, even though lower cost proposals may be selected, the tender may be ineffective at achieving desired environmental improvements, leading to efficiency at the cost of low effectiveness.…”

“…Participation rates are required to be high enough ensure sufficient competition for the limited budgets available, thus avoiding inefficiencies in the selection process, constraining opportunities for strategic behaviour, and ensuring that program targets are met (Ferraro, 2008, Blackmore and Doole, 2013, Whitten et al, 2013, DePiper, 2015, Palm-Forster et al, 2016a,b, Holzer et al, 2017. Low participation rates make it difficult to identify and select lower cost bids if many low-cost individuals did not participate; they may also allow greater levels of information rent seeking (generating efficiency losses), and make it difficult to allocate program funds wisely to achieve program targets (effectiveness losses) (Iftekhar et al, 2014).…”

Farmer preferences for conservation incentives that promote voluntary phosphorus abatement in agricultural watersheds

“…Second, when farmers are skeptical of a particular incentive or they perceive that it will have high transaction costs, they will demand higher payments, as in the case of BMP insurance. See Palm-Forster et al (2016b) for a more in-depth analysis about how transaction costs affect farmer participation and cost-effectiveness of conservation auctions. In this study, farmers were equally willing to accept direct payments and tax credits in exchange for implementing conservation actions.…”

Land use and ecosystem services

“…15. It is worth noting that complex agri-environmental programmes designed to improve costeffectiveness may dissuade some land owners from applying, particularly when auction design minimises information rent (overcompensation of income forgone) or when there is a significant chance that landowners application (or bid) will be rejected (Palm-Forster et al, 2016).…”