Investigating the performance of market-based instruments for resource conservation: the contribution of agent-based modelling

Auctions are increasingly being considered as a mechanism for allocating conservation contracts to private landowners. This interest is based on the widely held belief that competitive bidding helps minimize information rents. This study constructs an agent-based model to evaluate the long term performance of conservation auctions under settings where bidders are allowed to learn from previous outcomes. The results clearly indicate that the efficiency benefits of one-shot auctions are quickly eroded under dynamic settings. Furthermore, the auction mechanism is found to be inferior to fixed payment schemes except when the latter involve the use of high reserve prices.