Testbed Experiments for Improving the Cost-Effectiveness of the Conservation Reserve Program

2017

The Conservation Reserve Program (CRP), the world’s largest conservation program, pays farmers to voluntarily establish conservation cover on approximately 30 million acres of environmentally sensitive cropland. We conduct a laboratory study of several auction alternatives for the CRP and test their performance in terms of efficiency and cost-effectiveness. We focus on (i) the current price cap format studying the impact of different degrees of price-cap tightness, and (ii) on comparing the price-cap auctions with two alternative formats based on reference prices—one in which the reference is determined exogenously and another in which it is determined endogenously. We find that, as expected, excessive tightening of price caps forces participants out, damaging efficiency and cost effectiveness. Second, substantial relaxation of the price cap does not hurt efficiency nor participation, but it does hurt cost-effectiveness by allowing higher rents. On balance, relaxing price caps is preferable to tightening them in terms of cost effectiveness. Third, the exogenous reference price format allows medium-cost bidders to submit offers that are competitive against low-cost bidders. Both efficiency and cost-effectiveness are hurt. The endogenous reference price, outperforms the exogenous reference price in terms of cost-effectiveness by increasing participation and reducing rents.

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Recommended citation: Cramton, P., Hellerstein, D., Higgins, N., Iovanna, R., López-Vargas, K. (2017). "Testbed Experiments for Improving the Cost-Effectiveness of the Conservation Reserve Program." Working Paper.