[PPT] - with Bidirectional Externalities Pak-Sing Choi, Ana PowerPoint Presentation

SLIDE 1

Conservation Procurement Auctions with Bidirectional Externalities

Pak-Sing Choi, Ana Espínola-Arredondo, Félix Muñoz-García School of Economic Sciences Washington State University

Fall 2016

SLIDE 2

How to design optimal procurement mechanisms for

Conservation Reserve Program (CRP) when bi-directional externalities exist between the bidders and the non-bidders?

Question

SLIDE 3

The literature mainly considers unidirectional externality from the winners on the outside options/ reservation utilities of non-winners. Negative Externality on Market Activities

Wetland rehabilitation invites migratory birds

 Increase the risks of avian influenza outbreak

Conservation Projects Market Activities

Motivation

SLIDE 4

However, the external effects of outside options on the implementation costs of conservation projects are not considered. Negative Externality on Conservation

Farming draws water from aquifers

 More costly to rehabilitate wetlands

Conservation Projects Market Activities

Motivation

SLIDE 5

Contribution

Introduce bi-directional externalities to procurement auctions

whereby the procurer can decide the project allocations by accounting for the directionality and effects of externalities.

Output-reducing effect of externalities are cumulative and are

more pronounced under incomplete information.

SLIDE 6

Auctions are more efficient than flat-rate payment schemes (Latacz-

Lohmann, 2005) despite information rents (Kirwan et al., 2005).

Unidirectional Externality Bidirectional Externalities Unidimensional Type Jehiel et al. (1996, 1999, 2000) Espínola-Arredondo (2008) Figueroa & Skreta (2011) This Paper Bidimensional Types Che (1993) Branco (1997) Rochet and Stole (2003) This Paper

Literature

SLIDE 7

Bidder i observes

; but everyone knows

Quasilinear utility function:

– convex cost in output attenuated by efficiency – cost augmented by negative externalities from others – for market activities, where is market price

Social welfare function:

– value function increasing and concave in conservation – λ is the shadow cost of raising public funds

 

,

C M i i

   ~ ,

i i i i

F       

     

, , ,

K K K K K K K J K i i i i i i i i i

U q t q C q q  



 

K i

q

K i



 

  

 



1

C C i i i i i

W q V q t q    

C i

q

J i

q

 

M M M i i i

t q p q   p

Model

SLIDE 8

Attenuation of Negative Externality by Efficiency

SLIDE 9

The procurer chooses

to solve s.t. (IRCi)

Optimal conservation output
Optimal transfer payment

 

 

  



 

1

1 ,

1

max

N C C C i i i i

N C C C i i i i i q t q

V q t q  



     



 

 

, , ,

C C C C M M M M C M i i i i i i i i i i

U q U q         

 

   

1 , ,

C C M M C i i i i i i i i

MB q MC q q MEC q q 

 

      

 

 

,

C C C i i i

q t q

Complete Information

     

ˆ ˆ , , , ,

C C C C M C M M M C M i i i i i i i i i i i

t q C q q p q C q q  

 

   

SLIDE 10

Negative Conservation Externality on Other Bidders

SLIDE 11

Using the DRM, the procurer chooses

to solve s.t. (IRCi) (BICi)

Optimal conservation output
Optimal transfer payment

 

 

  



 

1

1 ,

1

max

N C C C i i i i

N C C C i i i i i q t q

V q t q  



     



 

, ,

C C C C M M M M i i i i i i i i

U q U q     

 

   

1 , ,

C C M M C i i i i i i i i

MB q VMC q q VEC q q 

 

      

 

 

,

C C C i i i

q t q

Incomplete Information

 

   

 

ˆ ˆ ˆ ˆ , , ,

C C C C C C C C C C C i i i i i i i i i i

U q U q         

 

   

 

ˆ ˆ ˆ ˆ , , ,

M M M M M M M M M M M i i i i i i i i i i

U q U q         

     

ˆ ˆ , , , ,

C C C C M C M M M C M i i i i i i i i i i i

t q C q q p q C q q  

 

   

SLIDE 12

Unobservable Conservation Efficiency

SLIDE 13

Unobservable Production Efficiency

SLIDE 14

* C i

q

* C i

q

* 1 C i

q

* 2 C i

q

First Best Hidden Information Conservation Externality Production Externality Marginal Benefit

C i

q

Cost

Layers of Externalities

SLIDE 15

Enrolls bidder i if his welfare contribution is positive.

1. His conservation benefits less his transfer payment. 2. His conservation externality on the other bidders. 3. His (stopping of) production externality on the other bidders.

Score Function

 

  



   

 

ˆ ˆ 1 , , , , ˆ ˆ 1 , 0, , , , , ˆ 1 , , , , 0, ,

D C C C M C M M M C M i i i i i i i i i i i j M C M M M C C M M j k j j j i k j j j i i j C C M M C C C M C j j i k j j j k j j i i

W q V q C q q p q C q q C q C q q q q C q q q C q q             

   

                           

 

SLIDE 16

Conclusion

The procurer’s lack of information would generate greater

inefficiencies in the presence of bi-directional externalities.

Positive externalities stimulate more conservation output, and

that positive and negative externalities offset each other.

In the case of high transfer payments and significant negative

externalities, conservation output may be reduced to zero.

SLIDE 17

Extension

Collect and analyze datasets on conservation procurement

auctions to quantify the bi-directional external effects.

Imperfect competition and market for heterogeneous goods.

Also simultaneous market activities and conservation projects.

Consider how the different components in an ecosystem and

the market interact when developing conservation projects.