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  5. Additionality and Asymmetric Information in Environmental Markets: Evidence from Conservation Auctions

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Additionality and Asymmetric Information in Environmental Markets: Evidence from Conservation Auctions

  • Karl M. Aspelund
  • Anna Russo
American Economic Review (Forthcoming)

Abstract

Mechanisms that aim to reduce environmental degradation at low cost can be undermined when participants’ conservation actions are not marginal to the incentive — or “additional” — as the lowest-cost participants may not be the highest social value. We investigate this challenge in the Conservation Reserve Program’s auction mechanism for ecosystem services, linking bids to satellite-derived land use. Three-quarters of marginal auction winners are not additional. The heterogeneity in counterfactual land use introduces adverse selection. We develop a model of bidding and additionality to quantify welfare implications. Alternative auctions increase efficiency by using scoring rules that incorporate expected land use impacts.

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