Designing a Procurement Auction for Reducing Sedimentation: A Field Experiment in Indonesia

The setting of this study is a watershed in Lampung, Indonesia where soil erosion has broad implications for both on-site and off-site environmental damage. The strategy to engage farmers in environmental protection initiative is through the Payment for Environmental Services (PES) scheme. A key condition of PES is transparency regarding the conditions under which incentives or rewards can be granted. Balanced information and the power of transaction are the basis for any environmental service (ES). A contract procurement auction is an alternative mechanism for extracting information from ES providers on levels of payments or incentives that will cover their costs when joining a conservation program. This study tested the application of a procurement auction method to reveal hidden information on the opportunity costs of supplying environmental services. The result show that a seal-bid, multiple round second-price Vickrey auction with a uniform price can be applied where most of the auction participants have a low education level, low asset endowment, small plot size and where market-based competitiveness is not common. It reveals too that farmers' bids to be involved in conservation contracts is more dependent on their learning process during the auction than observable factors such as their socioeconomic background, their awareness of conservation and their social capital state. Finally, it shows that introducing procurement auction as a market-based approach to rural communities does not harm their social relationships and is an applicable method in a rural setting.