Scoring two-dimensional bids: how cost-effective are agri-environmental auctions?

This paper analyses the cost-effectiveness of agri-environmental auctions that solicit two-dimensional bids consisting of conservation activity and compensation payment. Taking a self-selecting contract schedule as a benchmark, an optimally designed auction has the potential to reduce government expenditure significantly. However, the relative cost-effectiveness of a multi-dimensional auction is determined by the bid scoring system and farmers' expectations of the maximum acceptable bid score. The article elaborates conditions for a bid scoring rule that optimises cost-effectiveness and tests how benefits of an auction approach may be eroded if farmers' expectations of the maximum acceptable bid score diverge from the level consistent with this optimum.