Bidding behavior in environmental contract auctions with incomplete monitoring

It is well known from the compliance literature that whenever it costly tomonitor agents' compliance to contract terms, compliance is likely to beincomplete. This paper goes one step further by examining the implications ofincomplete monitoring on agent's sales offers in auctions for environmentalcontracts.From a monitoring perspective we show allocation contracts to least cost alsoproduces another gain – that less resources need to be spend on monitoring andenforcement. To get full use of this insight one needs to have auction proceduresthat provide incentives for truthful revelation of agents' private alternateincomes.Our second result is that the incentives for truthful revelation is lost whenmonitoring is incomplete unless the expected value of compliance exceeds theexpected value of noncompliance. We demonstrate this result theoretically andthrough an economic experiment using an induced value reverse multi unitauction.