Auctioning Conservation Payments using Environmental Indices

A framework for analyzing conservation programs that rank applications using environmental indices is presented. We derive the optimal bid from the farmer's perspective for both land retirement and working lands agri-environmental payment programs and we analyze how these solutions depend on program design parameters. The distinction is made between environmental objectives based on whether the farmer exercises control or not over the level proposed in a bid to participate in a program. The optimization model is solved analytically for two cases - a land retirement and a working lands program - highlighting the differences in the results. For land retirement programs we conclude that, for the cases considered, the exogenous environmental performance does not affect the endogenous environmental performance offered in a bid, but it does impact the rental rate requested. For working lands payments programs we find there is no interior solution to the decision problem, which generates a dichotomy between sets of parameters that either favor bidding based on past stewardship and low payments, or favor providing bids with higher endogenous environmental performance but requesting the maximum allowable payment. A sufficient condition is derived for the latter case to apply. A simulated auction example highlights for a working lands program that changing the objective weights can have more than proportionate impacts on the endogenous environmental performance offered by farmers. This result is in strong contrast with the relative stability of the outcome of the simulated auction for the land retirement program.