Auctioning conservation contracts in the presence of externalities

Current models of conservation auctions do not permit for the presence of environmental externalities and synergies between bidders. Yet, conservation auctions are usually set up for the very purpose of addressing problems associated with environmental externalities. Clearly, our models do not tell the whole story, and they consequently fail to identify waste and inefficiency in these auctions. Our paper shows how externalities between bidders can be incorporated into our models of conservation auctions, and uses this framework to investigate the cost-efficiency of the uniform-price auction when neighbours can bid jointly. Allowing neighbours to bid jointly allows them to internalise these externalities, but also reduces the competitiveness of the auction. The net effect on cost-efficiency is ambiguous, so we show how simulation can be used to determine in what circumstances joint bidding can be expected to reduce the payments needed to secure a given amount of ecosystem services.