Analysis Communication, competition and social gift exchange in an auction for public good provision Nora Vogt a, ⁎, Andrew F. Reeson b , Kilian Bizer a a University of Göttingen, Department of Economics, Platz der Göttinger Sieben 3, 37073 Göttingen, Germany b CSIRO Ecosystem Sciences, Clunies Ross Street, Black Mountain, Acton ACT 2601, Australia abstract article info Article history: Received 11 July 2012 Received in revised form 23 April 2013 Accepted 26 April 2013 Available online 24 May 2013 Keywords: Experimental economics Trust Communication Market bilateralisation Conservation tenders Reverse auctions Payments for ecosystem services Reverse auctions are an established policy instrument for allocating conservation contracts. While the auction mechanism has been the subject of a number of studies, less attention has been paid to the post-bidding contract phase. As contracts involving natural resource management are usually incomplete, trust becomes crucial for the effectiveness of the programme. We test the effect of communication between auctioneer and bidders on bidding behaviour and contract fulfilment using experimental economics. We combine a repeated reverse auction with an effort-level game and use a bilateral chatting tool as treatment variable. Without communication, auctioneers tended to select the lowest-priced bidders, who invested substantially less than the socially optimal level of effort when fulfilling their contract to provide the public good. Relational contracting proved important, with effort levels and profits tending to be higher when auctioneers and bidders entered into consecutive contract relation- ships. In the communication treatment there was no evidence of price competition, as auctioneers were more likely to accept high-priced bids. However, an overall higher price level did not lead to efficiency losses, since contractors realised higher effort levels in return, establishing a ‘social gift exchange’. Our results demonstrate the importance of trust-based relationships between the auctioneering institution and landholders. © 2013 Elsevier B.V. All rights reserved. 1. Introduction Conservation auctions do not take place in a social vacuum. These re- verse 1 auctions (also known as competitive tenders) typically involve landholders submitting bids to provide conservation or other ecosystem services on their land. The conservation agency selects the most cost effective bids and enters into a contractual relationship with those landholders, which will usually run for several years. It is therefore appropriate to consider conservation auctions as a two-stage process, composed of a bid selection stage and a contract stage. While the bid selection stage serves to identify the optimal contractors according to a ranking rule, the ecological good is produced in the contract stage at a specified price. This price is determined as contractors make bids on the basis of their opportunity costs (foregone profit) and their prospec- tive cost of effort. But, often neither the exact quantity nor quality of the targeted ecological good can be defined in concrete terms. Therefore, the resulting contractual agreement is in most cases incomplete. Fur- thermore, regular monitoring, and if necessary enforcement, of site ac- tivities after contract conclusion is often too costly to implement. Given these sources of information asymmetry, the success of the conserva- tion measure hinges to a large extent on the willingness and capabilities of the contracting land managers and on the ability of the agency to se- lect trustworthy bidders. This makes the social dimension a particularly important aspect of successful cooperation in natural resource manage- ment (cf. Reeson et al., 2011a). Experimental economic research methods can contribute to what can be called the ‘ socio-ecologic’ research agenda (Anderies et al., 2011; Ostrom, 2010). Laboratory experiments have already generated impor- tant insights on bidding behaviour in conservation auctions (e.g., Cason and Gangadharan, 2004; Reeson et al., 2011b; Schilizzi and Latacz- Lohmann, 2007). While most studies to date have focussed on the bidding phase, far less is known about the specific relationship between auction- eer and bidders and its potential relevance for ex-post contract fulfilment. It is the aim of this article to employ an experimental approach to exam- ine the particular role of trust in conservation auctions. Trust, which can be understood as an investment decision that leads to positive returns only if reciprocated by the trustee, is a prerequisite to successful cooperation (Ostrom, 2003, 2010; Pretty and Ward, 2001). Under the assumption of pure rationality, economic agents are not expected to trust as the implicit risk of defection prevents cooperation, leading to suboptimal results such as an underprovided public good. 2 Ecological Economics 93 (2013) 11–19 ⁎ Corresponding author. Tel.: +49 551 3912330; fax: +49 551 3919558. E-mail addresses: nora.vogt@wiwi.uni-goettingen.de (N. Vogt), andrew.reeson@csiro.au (A.F. Reeson), bizer@wiwi.uni-goettingen.de (K. Bizer). 1 Unlike auction formats which maximise the purchase price (e.g., English auction), a reverse auction establishes a downward bidding competition in order to select the lowest-priced seller of a specific good or service. 2 As Mettepenningen et al. (2011) point out, trust in the participants of conservation programmes can increase efforts towards good programme design which potentially increases the effectiveness of the programme but raises public transaction cost as well. 0921-8009/$ – see front matter © 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.ecolecon.2013.04.017 Contents lists available at SciVerse ScienceDirect Ecological Economics journal homepage: www.elsevier.com/locate/ecolecon