Thesis introduction
1.3 Research questions
This thesis explores the use of auctions in the allocation of contracts in payment schemes, taking into account the role of social interaction. Social interaction is considered as a means for land users to inform themselves in order to optimize their strategies. Social interaction affects their expectations and perceptions. Thus, personal social networks are an important determinant of participation (Sun & Müller 2012, p.2). The thesis addresses four different research questions, which are explained in the following.
The first research question is whether discriminatory auctions can be more cost-effective than fixed payments when bidders learn and adapt their strategies through social interaction over time. If land users interact with their acquaintances in their social network, seeking for information about their bidding strategies, over time they will have a better approximation of the bid cap. This will allow them to increase their information rents. In this context the thesis explores the role of the structure of the social network in the performance of auctions.
The second question is whether discriminatory and uniform auctions can induce a cost-effective provision of environmental services and pro-poor effects at the same time in a low-income country setting, where risk averse land users face uncertainty about their future oppor-tunity costs, and when they learn through social interaction.
1.4. Outline
The third question is how can contracts in payment schemes be designed in order to over-come the problem of asset specificity, such that the scheme doesn’t impose risk for the agency, and such that land users do not fear to lose their quasi rents.
The fourth question is whether auctions can provide environmental services cost-effectively when participation requires investments in specific assets, considering that social interaction frames learning effects and the reputation of the agency.
1.4 Outline
Each of the following four chapters is dedicated to answering the four research questions. In order to simulate the implementation of auctions, we used based modeling. Our agent-based models are written in Java by means of Repast Simphony 2.5, an open source modeling toolkit developed by North et al. (2013) in the operating system Microsoft Windows and Java 8. Repast Simphony is an open source agent-based modeling and simulation platform that simplifies model creation and use. It supports the development of flexible models of interacting agents.
Chapter two addresses the question of the cost-effectiveness of repeated discriminatory auc-tions when bidders learn through social interaction. In order to answer this question, we ex-tended the model of Hailu and Schilizzi (2004). The authors simulate a payment scheme for biodiversity conservation, where contracts are allocated by means of fixed payments and dis-criminatory auctions. Instead of adapting their bids according to a reinforcement learning algorithm, land users are embedded in a small world network that allows them to interact with their neighbors, and to learn from this social interaction. This chapter was submitted to the Journal Biodiversity and Conservation as a manuscript entitled "Learning from social interac-tion in repeated conservainterac-tion aucinterac-tions", written by Elsa Maria Cardona Santos, Sebastian Rasch and Hugo Storm.
Chapter three addresses the question of the potential of uniform and discriminatory auctions to induce pro-poor effects, while providing services cost-effectively. An agent-based model simu-lating conservation auctions in a low-income country is used to answer this question. Land users are assumed to be risk averse and to face uncertainty regarding future opportunity costs. This chapter was submitted to the Journal Biodiversity and Conservation as a manuscript entitled
"The use of repeated conservation auctions in low-income countries: An agent-based computa-tional model of uniform and discriminatory auctions", written by Elsa Maria Cardona Santos, Sebastian Rasch and Hugo Storm.
The contractual possibilities to deal with the problem of asset specificity are reviewed in chapter four. Different propositions about the design of contracts are developed for different implementation contexts. These are compared to the contract design of already implemented schemes, through which land users were paid for tree planting and conservation. Chapter five addresses the use of auctions to allocate contracts that require specific investments. An agent-based model with empirical data from a tree planting trial in Malawi is used for this purpose.
This trial was implemented by Kelsey Jack, and is explained in detail in Jack (2010). The scheme simulated requires land users to retire cropland, and to invest in tree planting. The use of uniform and discriminatory auctions is analyzed for the allocation of short and long-term contracts. This chapter will be submitted as a manuscript entitled "The use of auctions in payment schemes that require specific investments: : An agent-based computational model", written by Elsa Maria Cardona Santos, Sebastian Rasch and Hugo Storm. The last chapter summarizes the most important findings of this research and provides an overall conclusion.
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