FEEM working papers "Note di lavoro" series
2014 .065

Bidding for Conservation Contracts


Authors: Luca Di Corato, Cesare Dosi, Michele Moretto
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Keywords: Conservation Contracts, Scoring Auctions, Non-enforceable Contract Duration, Real Options
JEL n.: C61, D44, D86, Q24, Q28

Abstract

Contracts providing payments for not developing natural areas, or for removing cropland from production, generally require long-term commitments. Landowners, however, can decide to prematurely terminate the contract when the opportunity cost of complying with conservation requirements increases. The paper investigates how this can affect bidding behavior in multi-dimensional auctions, where agents bid on both the conservation plan and the required payment, when contracts do not provide for sufficiently strong incentives against early exit. Integrating the literature on scoring auctions with that which views non-enforcement of contract terms as a source of real-options, the paper offers the following contributions. First, it is shown that bidders’ expected payoff is higher when facing enforceable project deadlines. Second, that failure to account for the risk of opportunistic behavior could lead to the choice of sellers who will not provide the contracting agency with the highest potential payoff. Finally, we examine the role that eligibility rules and the degree of competition can play in avoiding such potential bias in contract allocation.

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