An assessment of four popular auction mechanisms in the siting of NIMBY facilities: some experimental evidence

The issue of locating locally unfriendly but socially beneficial facilities such as landfills and power stations is an important public policy concern in many countries. Local residents in the area where such facilities are to be located tend to exhibit strong opposition, no doubt due to the asymmetric distribution of the costs and benefits of such not-in-my-backyard (NIMBY) facilities. A potentially useful mechanism for the siting of such facilities is by compensation auctions, which attempt to incorporate the market mechanism into the decision making process. In such auctions, communities name the compensation they require to host such facilities, and the community demanding the least amount of compensation gets to host the facility. This research attempts to evaluate the performance of such compensation auctions using laboratory exepriments. Four popular auction formats are evaluated: first- and second-price and all-pay first-and second-price sealed-bid auctions. The latter two formats correspond to the compensation auctions with penalty payments proposed by Kunreuther and Kleindorfer (1986) and Quah and Tan (1998), who claim that these auctions are more efficient as they restrains strategic (or over) bidding. Our results, however, contradict this claim. We show that the first-and second-price auctions without penalty payments are in fact more efficient, in that they tend to minimize social costs, and truthful bidding is more likely.