Coordination and Strategic Behaviour in Landscape Auctions

Designing a conservation auction where bidders know the ecological value of their land poses challenges for policy makers because bidders will tend to increase their asking price. This is known as strategic behaviour, and it is particularly prevalent in sequential auction settings. The tender process ceases to be competitive when strategic behaviour occurs, eroding the efficiency advantages of an auction. To overcome this problem, contract options can be designed such that early winners are restricted in their efforts to strategically manipulate auction outcomes. Simply offering multi-period contracts could achieve this goal if participants need to wait for their contracts to expire before they can change their asking price. This idea was tested in a laboratory setting using computer software to simulate a simplistic multi-period auction for conservation. The results indicate that auctions offering multi-period contracts might be better equipped to constrain strategic behaviour compared to single period contracts. The treatment leads to a more efficient outcome, which supports the conclusion that given certain design intricacies, competition in an auction for conservation can be preserved with the provision of a system that works to ‘lock-in’ winners.