Auction Design for Voluntary Conservation Programs

Auctions have been used to trade commodities as diverse as electricity, residential property, broadcast spectra, and emission rights. The effectiveness of auctions as allocation mech-anisms has been well documented (McAfee and McMillan, Wolfstetter, Klemperer). Using auctions to conserve natural resources on pri-vate land, however, is a relatively new concept (Latacz-Lohmann and Hamsvoort 1997, 1998). Land use practices such as commercial agri-culture, livestock grazing, and firewood col-lection have lead to environmental problems ranging from rising salt and nutrient levels in rivers and bays and wetlands degradation, to destruction of remnant vegetation and salin-ity. Nonpoint sources in agriculture generate a large fraction of certain types of pollution and farms are home to substantial native vegeta-tion, which has high conservation value. Un-fortunately, existing nonpoint source regula-tion and conservation programs have not been fully successful in engaging private landown-ers. One reason for this limited success is that, unlike conventional markets and point source emissions trading markets, it is difficult to clearly specify and observe the output in nonpoint source markets. A crucial problem, therefore, in the provision of environmen-tal services arises from the uneven distri-bution of information between landowners and the regulatory agency (Latacz-Lohmann and Hamsvoort 1997, 1998). Regulatory agen-cies have limited information about the costs landowners would incur in changing their man-agement practices. For example, a landowner