Improving the cost-effectiveness of the Conservation Reserve Program: A laboratory study*

The Conservation Reserve Program (CRP) is arguably the world's largest payments-for ecosystem services program, with $1.8 billion paid to farmers in 2017 for practices on 23.4 million acres. The CRP uses a pay-as-bid, reverse auction with field-specific price caps to enroll most of the land in the program. Economic theory and empirical studies from other domains suggest that the restrictive price-cap auction format used in the current design of the CRP exhibits issues in terms of efficiency and cost-effectiveness. Using a laboratory experiment, we study the impact of varying the tightness of the price-cap auctions. We also examine two alternative auction formats based on reference prices. We find that excessively tight bid caps reduce efficiency and cost effectiveness by discouraging participation. Conversely, bid caps set too high also reduce cost-effectiveness by allowing higher rents. An exogenous reference price ranking format, which makes medium-cost sellers more competitive against low-cost sellers, reduces both efficiency and cost-effectiveness. An endogenous reference price format increases cost-effectiveness by increasing participation and reducing rents. (c) 2021 Published by Elsevier Inc.

Automated summary

The study examines the impact of varying the tightness of price-cap auctions in the CRP and finds that excessively tight or high bid caps can reduce efficiency and cost-effectiveness. Alternative auction formats based on reference prices also present issues, with an exogenous reference price ranking format decreasing efficiency and cost-effectiveness, while an endogenous reference price format increases cost-effectiveness.