Bidding for Conservation Contracts

27 Pages Posted: 11 Jul 2014

See all articles by Luca Di Corato

Luca Di Corato

Ca Foscari University of Venice - Dipartimento di Economia

Cesare Dosi

University of Padua - Department of Economics; CRIEP - Centro Universitario di Ricerca sull’Economia Pubblica

Michele Moretto

University of Padua, Dep of Economics and Management

Date Written: July 11, 2014

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.

Keywords: Conservation Contracts, Scoring Auctions, Non-enforceable Contract Duration, Real Options

JEL Classification: C61, D44, D86, Q24, Q28

Suggested Citation

Di Corato, Luca and Dosi, Cesare and Moretto, Michele, Bidding for Conservation Contracts (July 11, 2014). FEEM Working Paper No. 065.2014, Available at SSRN: https://ssrn.com/abstract=2464942 or http://dx.doi.org/10.2139/ssrn.2464942

Luca Di Corato (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Cesare Dosi

University of Padua - Department of Economics; CRIEP - Centro Universitario di Ricerca sull’Economia Pubblica ( email )

via Del Santo 33
Padova, 35123
Italy
049+8274049 (Phone)
049+8274221 (Fax)

Michele Moretto

University of Padua, Dep of Economics and Management ( email )

via Del Santo 33
Padova, 35123
Italy
+39 049 8274265 (Phone)
+39 049 8274211 (Fax)

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