Pricing Rules for Pes Auctions : Evidence from a Field Experiment

Payments-for-Ecosystem-Service (PES) schemes increasingly use auctions to target funds to low-cost providers, aiming to increase efficiency and value-for-money. To date, these PES auctions have universally employed ``Pay-as-Bid'' (PaB) pricing, in which successful bids are paid the amount they stipulate. Alternative pricing rules exist - such as ``Uniform Price'' (UP), which pays successful bids the same per unit payment, determined by the marginal bid - and have been applied successfully in other settings. We explore the impact of UP pricing in the context of incentivising farmers to reduce nutrient run-off. In a field experiment the auction through which contracts were allocated to farmers switched from PaB to UP pricing. Our analysis provides the first real-world, causal evidence on the effect of auction pricing rules in this context. As predicted by theory, we find that UP pricing reduced mean bids, by 40%. A priori the impact on payments made to the farmers is ambiguous, yet we find these to be reduced by a similar amount. Moreover, the UP format reduces the incidence of costly bidding behaviours: bid-updating by over a half, and sniping by approximately 30%. These significant and substantial changes suggest that PES auctions should no longer ignore UP pricing