The experimental market established under this project was designed to test the performance of three basic mechanisms. The basic market was developed to enable farmers to obtain revenues from local residents who are interested in seeing grassland-nesting birds, particularly bobolinks, have a substantially higher success after a given nesting season. Normal hay harvesting practices generally lead to a harvest during the middle of the nesting season for grassland birds, with very high rates of nest and fledgling mortality. Bollinger et al. (1990), for example, show a strong tie between success of nesting bobolinks and the timing of hay harvests. While farmers are generally conservation-minded, their need to feed livestock and run their business often necessitates this direct conflict, so that if the public is to have higher levels of grassland bird populations, the public would need to compensate farmers to forego the early harvest (generally around June) of hay and to manage their farm around protecting nesting habitat.

For the experimental market reported here, it should be noted that the experimental approach placed the residents of Jamestown into a format for marketing that some may interpret as less-straightforward than what a small business might do if there was no experimental purpose. However, an ordinary small business would have been risking a lot on choosing one approach, perhaps risking complete failure or at least failure to identify the performance of any given mechanism relative to the potential value of the public good. Moreover, the project focused on methods other than the common “donations” approach, because this method is already well-used by non-profits and yet these non-profits are not typically applying the approach to encouraging farmers to managing for grassland bird nesting habitat. The project did include an extensive marketing effort that was designed to reach all residents of Jamestown with a common approach, through full-page advertisements in the Jamestown Press newspaper (already mailed to all homes in Jamestown ) and through stories in the news or posters placed in places typically visited by residents.

The Mechanisms Tested

The experimental mechanisms were introduced to each household through a mailing directed at that household. Each household was randomly assigned to one of three experimental mechanisms and to one of six farm-fields in 2007 and one of four farm-fields in 2008. Each experimental mechanism was designed to elicit an offer from an individual (household) that was willing to pay to help support bird-friendly management under a farm-wildlife contract. The mechanisms focus on reducing the incentives that individuals have to withhold payment, even though the person may value improved wildlife habitat services, because if other individuals pay for the contract the benefits still accrue to all individuals who value the services. This incentive to withhold payment is related to “free-riding” whereby individuals can “ride for free” on the payments made by others.

In each year of the market, there were three mechanisms tested. Two of these mechanisms were intended to raise revenues sufficient to cover the cost of a farm-wildlife contract. The third mechanism was designed to measure the potential value of the contracts to individuals, thereby establishing a baseline against which to measure the performance of revenue-raising mechanisms. This third mechanism was not intended to raise sufficient revenues to cover the cost of a contract, although in rare circumstances that is a possible outcome. All three mechanisms, in both years, gave residents a “money back guarantee” that if offers (revenues) collected fell short of the pre-established amount needed to pay for a farm-wildlife contract, then any contributors would have 100% of their payment refunded. The marketing materials emphasized that all monies collected would either be used to pay the costs of a farm-wildlife contract or would be refunded.

The mechanisms then differed with regard to the disposition of any money raised in excess of the amount needed to pay for a contract. The rules for such rebates (or refunds) were designed to reduce the cost to an individual of making a decision to provide an extra dollar when, in retrospect, that dollar was not absolutely necessary to cover the cost of the farm-wildlife contract. Identifying rules that work more effectively is often an objective of experimental economics and mechanism design. These rules were explained on “payment cards” or “offers” made to individuals within the direct mail marketing materials sent to each household.

One revenue-raising mechanism is dubbed the Proportional Rebate (PR) mechanism. When the total of offers made for a field exceeds the cost of the farm-wildlife contract, then excess money is returned in proportion to each individuals share of the total of all contributions. For example, if the funding-target (i.e., the cost of a farm-wildlife contract) is $100 and the PR mechanism collects $200, then half of all contributions are “extra” and the individuals who contributed are given a rebate of 50% of their contribution. (Note that the numbers here are chosen for illustration. Actual numbers would be scaled to reflect the costs of a farm-wildlife contract, which may be tailored to the unique situation of each farmer and his or her field(s).) This PR mechanism has been extensively studied by experimental economists. However, in experiments done by these economists, generally the public good is simulated through the use of carefully designed incentives and pay-offs, whereas the project here uses management of hayfields for grassland birds as a real public good and enables testing of revenue-raising mechanisms in an actual community. Work in experimental economics laboratories shows that the PR mechanism raises significantly more money (revenue) than simple donations or than donations with a money-back-guarantee without any rebate rules. An advantage to the PR mechanism is that each contributor ends up paying the same proportion of their offer, which some individuals might see as fair to all contributors.

The second revenue-raising mechanism is denoted the Uniform Price Auction (UPA). Under this mechanism, if the total of all offers for a farm-wildlife contract exceeds the cost of the contract, then the rebate rules require the administrator (i.e., the market-maker) to attempt to identify a single, uniform price that would be the same for all people who end up paying. As implemented here, the UPA would make a full refund to anyone who offered to pay less money than the calculated uniform price, and would rebate all money in excess of the uniform price for those individuals who offered more than the uniform price. This mechanism has the advantage that if an individual ends up paying into the farm-wildlife contract, that individual pays the same dollar amount as everyone else and the value the person has offered for the contract is higher than the amount the individual pays. Some individuals might view this uniform price approach as more similar to their experience in ordinary markets, and therefore more fair. A key disadvantage is that because individuals who offered something less than the uniform price will pay nothing, it is possible that even though the total of offers exceeded the cost of a farm-wildlife contract, it may be that no uniform price can be found; in that event, the farm-wildlife contract is not implemented and everyone receives a full refund. The UPA was only used in the 2007 market.

In 2008, the UPA mechanism was replaced by a mechanism denoted as the Uniform Price Cap (UPC). This mechanism was similar to the UPA but was designed to eliminate the key disadvantage of the UPA. Under UPC, if the total of all offers is sufficient to cover the cost of a contract, the market-maker then calculates a uniform price cap that sets the maximum amount that any individual will pay while still raising enough revenues to pay for the costs of implementing a farm-wildlife contract. Anyone who made an offer that is less than the price cap will only pay the amount of their offer; anyone who made an offer of more than the price cap will receive a rebate of any money in excess of the price cap. The UPC has the advantage that, for any collection of offers, if the PR mechanism ends up funding a farm-wildlife contract, the UPC could also raise enough revenues to fund the contract. UPC has the disadvantage of increasing the link between the offer that individuals make and the amount the individual ends up paying. (That is, the UPC increases the link between what an individual says a good is worth to him or her and what the individual actually pays.) This link encourages individuals to down-grade their offers relative to their true values for a farm-wildlife contract because by doing so they create an opportunity to let other contributors pay more of the costs.

In each year, the third mechanism tested was the Pivotal Mechanism (PM), which was not designed to raise revenues to actually fund a farm-wildlife contract. However, on economic theory grounds, the PM establishes an important baseline against which to measure the value of a farm-wildlife contract to the community. The PM has the property of “incentive compatibility,” meaning, in this context, that the PM gives individuals an incentive to make an offer to pay for a farm-wildlife contract that is fully consistent with that individual’s true value for the contract. Incentive compatibility is established by rules for payment (and refunds) that make each person pivotal (critical) to the final outcome for any particular farm-wildlife contract. Under PM, if the total of all offers exceeds the cost of the contract, each individual person’s payment depends only upon whether they were actually critical to the final outcome. In particular, each individual only pays their offer if, after accounting for offers from all others, the market-maker still needs this individual’s offer to cover the cost of implementing the farm-wildlife contract. The person then has an incentive to offer their full value for the contract because, if the person is not pivotal, he (she) pays nothing, but if the individual offers less than his (her) full value and the contract could have been implemented had the individual offered his full value, then the individual is no worse off but getting the contract implemented and having to pay his offer.

In the experiment then, we expect the highest offers to come from the PM, since the PR, UPA and UPC mechanisms are not incentive compatible. There is no solid basis to rank these latter three mechanisms, but for PR there is some experimental research suggesting that the mechanism is very effective and in a separately funded project, Chhandita Das and Chris Anderson have produced results that PR produces offers in experimental economics laboratories that are statistically equivalent to results for the PM.