Conservation procurement auctions with bidirectional externalities

This study analyzes a conservation procurement auction with bidirectional externalities, that is, conservation output can affect the costs of individuals dedicated to market production, and vice versa. The procurer does not observe bidders’ efficiency in conservation or market production. Each market failure alone (asymmetric information or the presence of externalities) deviates optimal output away from the first best. Their coexistence, however, rather than producing larger output inefficiencies, can move optimal output closer to the first best when negative conservation externalities are minor. In this setting, the benefit from acquiring information about bidders’ types is small. In contrast, when conservation externalities are substantial, the procurer would have strong incentives to acquire information before designing the auction.