Transaction Costs, Participation, and the Cost-Effectiveness of Reverse Auctions: Evidence from a Laboratory Experiment

Tongzhe Li, Leah H. Palm-Forster () and Siddika Bhuiyanmishu ()
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Leah H. Palm-Forster: University of Delaware
Siddika Bhuiyanmishu: World Bank

Environmental & Resource Economics, 2025, vol. 88, issue 2, No 5, 397-424

Abstract: Abstract Reverse auctions are often recognized as a tool that can cost-effectively allocate agri-environmental program funds to support environmentally-beneficial land management practices. However, transaction costs can limit participation in auctions which limits their cost-effectiveness. We use a laboratory experiment to examine how various levels of transaction costs influence participation and bidding behavior in discriminatory-price reverse auctions in low and high budget scenarios. Our experimental results show that transaction costs limit auction participation, increase bid amounts, and reduce cost-effectiveness. The negative effect of transaction costs on participation is particularly large when the budget level is low. Using the results of our experiment, we design a simulation to investigate whether reducing transaction costs via subsidies could increase program cost-effectiveness under various conditions. We find that transaction cost subsidies increase auction cost-effectiveness; however, our study raises new questions about how these subsidies are designed and the implications for the overall costs and benefits of efforts to reduce transaction costs in reverse auctions.

Keywords: Agri-environmental policy; Conservation tender; Participation rate; Payment for environmental services; Reverse auction; Transaction costs (search for similar items in EconPapers)
JEL-codes: Q15 Q24 Q28 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10640-024-00935-1

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