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Originally published Vol. 5,
Issue 1 (February 2007)
Bidding Enhances Conservation Program Cost Effectiveness
Robert Johansson and Marca
Weinberg
Much of USDA conservation policy relies on
voluntary incentive-payment programs designed to
encourage farmers to undertake conservation efforts
that address resource concerns on their farms. Program
managers can solicit information on conservation
costs and potential environmental benefits from
farmers interested in participating in conservation
programs through a process known as bidding. This
process is analogous to a homeowner’s solicitation
of bids from contractors for a desired home addition.
Different contractors propose various offers—
some are cheaper, some are more expensive; some
are finished more or less quickly; and so on. Based
on financial constraints, zoning requirements, and
other preferences, the homeowner selects the best
fit.
A conservation program manager
can ask farmers to forward a bid that specifies
which conservation practices they will install,
on what land, at what price, and over what period.
Program payments —the “price”
the farmer receives—could be set at a fixed
practice-specific rate, or farmers could offer to
accept a lower payment rate. Farmers would “bid
down” the payment rate according to their
own costs for installing and maintaining that practice,
but only if it was in their best interest to do
so. The program manager, like the homeowner, can
then rank the bids in terms of costs, benefits,
or both.
ERS researchers used an empirical
model of U.S. agriculture and its environmental
impacts to simulate the outcomes of two types of
program design, given a fixed budget. One program
fixes a payment level for improved environmental
performance on cropland remaining in production
and then selects farmer contracts with the highest
expected environmental benefits first. The other
program allows farmers to bid down costs for improved
environmental performance on cropland remaining
in production and then selects contracts with the
highest benefits relative to costs first. Simulation
results suggest that if farmer contracts were selected
on the basis of environmental benefits, environmental
performance on cropland could be improved by about
8.5 percent relative to the baseline at a cost of
$500 million. If bidding down costs were allowed,
the same $500 million program could improve environmental
performance by about 12 percent, relative to the
baseline.
The bidding process bottom line
is that a program with limited funds can provide
program managers benefit and cost information to
use in selecting the most cost-effective contracts
for enrollment, can provide interested farmers the
ability to compete for program enrollment, and can
result in increased cost effectiveness of the overall
program.
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