Provision Point Reverse Auction: A New Auction Mechanism with Applications for Conservation Contracts

Rent-seeking behavior by participants in payment for environmental services auctions reduces the number of affordable contracts and decreases environmental protection. I propose a new auction mechanism, the provision point reverse auction (PPRA), to mitigate this rent-seeking behavior. The PPRA includes a public component where the probability of contract acceptance for one individual is affected by the offers of others. I provide theoretical support for the new mechanism which proves that optimal offering behavior in a PPRA results in less rent-seeking from sellers than a multiunit reverse discriminative auction, even in contexts where participants are risk neutral and place no utility on the welfare of their peers. I follow this theoretical work with laboratory experiments comparing the PPRA to the multiunit reverse discriminative auction and the reverse budget-constrained auction. The experiments yield average offers between 12.57% to 58.17% smaller in a PPRA compared to the alternate reverse discriminative auctions, with the exact value dependent upon the compared mechanism and the target number of contracts. The experimental results are also compared to the theoretical predictions for a uniform price auction. I find that the PPRA is less expensive than the uniform price auction, while the effect on social efficiency is dependent on parameter values. If the goods being purchased are associated with positive externalities, as we would expect in PES or conservation contexts, the reduction in rent-seeking behavior can increase total surplus.