Additionality and Asymmetric Information in Environmental Markets: Evidence from Conservation Auctions

Abstract

Market mechanisms aim to reduce environmental degradation at low cost, but they are undermined when participants’ conservation actions are not marginal to the incentive — or “additional” — as the lowest-cost participants may not be the highest social value. We investigate this challenge in the Conservation Reserve Program’s auction mechanism for ecosystem services, linking bids to satellite-derived land use. Three-quarters of marginal auction winners are not additional. The heterogeneity in counterfactual land use introduces adverse selection. We develop a model of bidding and additionality to quantify welfare implications. Alternative auctions increase efficiency by using scoring rules that incorporate expected land use impacts.