Karen Larsen Markku Ollikainen

1. Auction Mechanisms for Water Pollution Abatement in Agriculture in Finland - an Experimental Study Karen Larsen MarkkuOllikainen Agrifood Finland (MTT) and Finnish environmental research institute (SYKE)

2. Motivation • With agriculture accountable for 50% of total nitrogen and phosphorus load into the Baltic Sea there is an immediate need for more efficient environmental programs for agriculture. • In August 2010 MTT and University of Helsinki ran a framed field experiment of an agri-environmental auction north of Helsinki. 9 farmers participated.

3. Gypsum • Regulator wanted farmers with high index parcels of land to spread Gypsum on the parcels. • Gypsum binds phosphorus in the ground and significantly decrease runoff of nutrients into the waterways. • Research has shown that gypsum has no negative effect on crop yield.

4. Gypsumauction - Bundle • Economies of scale: Farmers can bid on both individual parcels and bundles of parcels but a parcel can only win once.

5. Gypsumauction - Bundle • Economies of scale: Farmers can bid on both individual parcels and bundles of parcels but a parcel can only win once.

6. Gypsumauction - Treatments T1: Individual parcels no bundle T2: Individual and bundle R:Testing risk-aversion using Holt-Laury’s 10 lotteries A: Attitude to the environment

7. Objectives • to assess how the bundle mechanism affects bidding behaviour, information rent and efficiency of the auction • to look at how attitude to risk affects bidding behaviour.

8. Gypsumauction - Experiment • Run using Z-tree (Fischbacher) • Reverse auction, Sealed bid • Discriminatory price • Single round • No communication • Information only about own land. • Budget known (25.000 points) • Reserve price unknown • No loss

9. Gypsumauction - Experiment • 4 different types of farmers with 10 parcels each • Parcels vary in hectare size (1-8) and • Environmental index value (1-66) • Compliance cost • Cost of gypsum (€73 per hectare) • Cost of spreading (€8 per hectare, contractor) • Cost of delivery (1-4ha=€546, 4-7ha=€809, 8-10ha=€1024)

10. Gypsumauction - Experiment

11. Gypsumauction - Experiment

12. Gypsumauction – ExperimentAim: Minimize Information rent • Information rent = Bid – (Compliance cost + Transaction cost). • Compliance cost are known to the regulator • Cost of Gypsum, delivery and spreading • Experiment: Included • Transaction cost are unknown to regulator • Fixed cost: paper work, learning about the auction (costs associated with getting permission from owner) • Cost depending on hectares: supervision of spreading • Can we identify information rent?

13. Gypsumauction – No bundleMarket performance measures: P-MAR: Percentage of maximum abatement realized P-OCER: Percentage of optimal cost-effectiveness realized Profit: Seller’s profit

14. Gypsumauction – BundleMarket performance measures: P-MAR: Percentage of maximum abatement realized P-OCER: Percentage of optimal cost-effectiveness realized Profit: Seller’s profit

15. Risk aversion

16. Risk aversion

17. Nurmijärvi pilot results • 21 bids submitted (9 participants). • 11 were bundles – bundles popular

18. Literature list • Cason, T. (2004), “Auction design for voluntary conservation programs”, American Journal of Agricultural Economics, Dec. • Cason, T., Gangadharan, L., Duke, C. (2003): “A laboratory study of auctions for reducing non-point source pollution”, Journal of Environmental Economics and Management, Vol. 46, pp. 446-471. • Fischbacher, U. Program: Z-Tree (Zurich Toolbox for Readymade Economic Experiments) • Holt, Charles & Laury, S. (2002), “Risk Aversion and Incentive Effects”, The American Economic Review, vol. 92(5), pp. 1644-1655. • Latacz-Lohmann, U. and Van derHamsvoort, C., “Auction Conservation Contracts: A Theoretical Analysis and an Application”, American Journal of Agricultural Economics, 79 (May), pp. 407-418

19. Gypsumauction - Experiment

20. Gypsumauction - Experiment

21. Experiment – Gypsum auction

22. Experiment – Gypsum auction