Scoring two-dimensional bids: how cost-effective are agri-environmental auctions?

This paper analyses the cost-effectiveness of agri-environmental auctions that solicit two-dimensional bids consisting of conservation activity and compensation payment. Taking a self-selecting contract schedule as a benchmark, an optimally designed auction has the potential to reduce government expenditure significantly. However, the relative cost-effectiveness of a multi-dimensional auction is determined by the bid scoring system and farmers' expectations of the maximum acceptable bid score. The article elaborates conditions for a bid scoring rule that optimises cost-effectiveness and tests how benefits of an auction approach may be eroded if farmers' expectations of the maximum acceptable bid score diverge from the level consistent with this optimum. Oxford University Press and Foundation for the European Review of Agricultural Economics 2008; all rights reserved. For permissions, please email journals.permissions@oxfordjournals.org, Oxford University Press.