Transaction costs, competitiveness, and participation in reverse auctions: Evidence from a laboratory experiment

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Department of Applied Economics and Statistics, University of Delaware, Newark, DE.
Abstract Reverse auctions are designed to cost-effectively allocate agri-environmental program funds that support the adoption of best management practices. However, transaction costs and concerns about bid acceptance can limit the performance of reverse auctions, particularly for more complex working lands programs. We use a laboratory experiment to examine how various levels of transaction costs and budgets influence participation and bidding behavior in discriminatory-price reverse auctions. Consistent with economic theory, our experimental results show that transaction costs can limit auction participation and reduce program cost-effectiveness. The negative effect of transaction costs on participation is particularly amplified when the budget level is low, and therefore, the auction is more competitive. However, increased competition also places downward pressure on rent-seeking, which allows scarce program funds to support more projects. Using the results of our experiment, we design a simulation to investigate whether subsidies that offset participants’ transaction costs could increase program cost-effectiveness under various conditions. Our findings highlight the importance of considering how transaction costs and subsidizing strategies affect auction performance when implementing reverse auctions. Key words: agri-environmental policy, conservation tender, participation rate, payment for environmental services, reverse auction, transaction costs. JEL Codes: C90, D44, Q24, Q28
Agri-environmental policy, Conservation tender, Participation rate, Payment for environmental services, Reverse auction, Transaction costs