Auction scope, scale and pricing format: Agent-based simulation of the performance of a water quality tender

Conservation auctions are tender-based mechanisms for allocating contracts among landholders who are intertested in undertaking conservation activities in return for monetary rewards. These auctions have grown in popularity over the last decade. However, the services offered under these auctions can be complex and auction design and implementation features need to be carefully considered if these auctions are to perform well. Computational experiments are key to bed-testing auction design as the bulk of auction theory (as the rest of economic theory) is focused on simple auctions for tractability reasons. This paper presents results from an agent-based modelling study investigating the impact on performance of four auction features: scope of conservation activities in tendered projects; auction budget levels relative to bidder population size (scale effects); endogeneity of bidder participation; and auction pricing rules (uniform versus discriminatory pricing). The results highlight the importance of a careful consideration of scale and scope issues and that policymakers need to consider alternatives to currently used pay-as-bid or discriminatory pricing fromats. Averaging over scope variations, the uniform auction can deliver at least 25% more benefits than the discriminatory auction.