Does expected profit predict
compliance in auctions for payment
for ecosystem services?
A test case in Indonesia
Beria Leimona and L Roman Carrasco
Special thanks to Dr Meine van Noordwijk
C-02 (193) From understanding drivers to gaining leverage at
the tropical forest margins: 20 years of the ASB Partnership
Forest for People – Saturday 11th October 2014
XXIV IUFRO World Congress
Salt Lake City, Utah, USA

Background
• Farmers’ decisions towards land practices affect
environmental services provisions
o When private and social costs diverge: environmental
externalities
• Payments for environmental services:
performance-based scheme to align private and
social costs
– Varying at different scales of the landscape
• Global: carbon regulated and voluntary market
• National/Regional: payment/co-investment for watershed
services

Conservation Auction
• Alternative policy mechanism to extract information on level of
payments or incentives
• Procuring commodities for commodities without well-established
markets
• Conservation auction at developing countries (Malawi and
Indonesian cases):
– (uncertain) understanding the bidding strategy
– information asymmetries
• Ex-ante estimates of opportunity cost not well correlate with ex post realized
op. cost
• Hidden information and hidden action
– Power imbalance

Hypothesis
1. A multiple-round bidding for learning and assessing
break-even price and expected net benefit;
2. Variation in bid prices reflects variation in estimates
of opportunity and implementation cost
3. An auction can lead to a fair and socially acceptable
selection process for PES contracts;
4. A bidding process efficiently targets farmers likely to
comply as bid price

The analysis
• explored the level of understanding of
the bidding process;
• analyzed the bidding behaviour of the
farmers and socioeconomic factors;
• examined the potential predications of
eventual compliance of the
conservation contract

Case Study: Sumberjaya
 Coffee-based monoculture and
agroforestry
 High sedimentation rate reducing
water quality for the downstream
hydropower company
 Context:
 Low formal education level (< 7 years)
 Low asset endowment
 Small plot size (< 0.5 ha)
 Market-based competitiveness not
common
 Imperfect market for ES

Conservation Contract
Soil
conservation
activities
 Sediment pits: 300 per hectare, standard
dimensions size: 100x150x40 cm evenly
distributed
 Ridging: 50 percent of plot
 Vegetation strips: surrounding pits and ridging
 Maintaining all the land conservation structure
above for a year.
Payment
schedule
50 percent at inception; 50 percent at one year
contingent on performance
Duration and
monitoring
One year with monitoring every three months;
termination if 50% contracted activities not
completed by midterm monitoring date
 Cancellation or non-compliance results in:
 ineligibility for second payment installation
 friction and conflict among community members
 indication of corruption
Force majeur provision for contract terms in the event of natural
disasters

Supply curve from the conservation
reverse auction
• Total participants from 2 villages:
82 farmers bidding on 70 hectares
• Participants received contracts for
soil conservation:
34 farmers on 25 hectares
• Average price of contract:
USD 171.70 per hectare yearly
– labor requirements of contract
based on wages approximately USD
300
– Past investment for soil
conservation activities from survey
USD 225

Result 1: Farmers’ understanding of
auction design and opinion
• 4 % : did not understand and lost
• 32 % understood very well
• Satisfied with the completeness of information
• Relatively easy to understand the rules (winners are
better)
• 88 % perceived fair and not causing conflicts
• 78 % fully aware of competition

Result 2a: bidding behaviour model as a function
of farmers’ socioeconomic characteristics
Value Std.Error t-value p-value
(Intercept) 15.48 0.31 49.39 <10-4
Plot size -0.20 0.10 -1.99 0.049
Winning the previous round -0.20 0.06 -3.19 0.002
Quality of information received -0.15 0.07 -2.08 0.041
Awareness of competition among
participants
-0.34 0.15 -2.28 0.025

Result 2b: Socioeconomic correlates of
eventual compliance
Estimate Std. Error z value Pr(>|z|)
(Intercept) -6.55 3.3 -2.0 0.045
Education 0.26 0.2 1.6 0.109
Number of family members 1.35 0.7 2.1 0.039
Number of years owning the
0.13 0.1 2.3 0.021
land
Distance to road 0.06 0.0 1.9 0.057
Experience in applying
-1.59 0.8 -2.1 0.035
conservation techniques in the
past

Result 3:
Contract compliance

C1: An efficient mechanism to help farmers
identifying their opportunity cost
(accept H1 and H2)
• Bidding behaviour of farmers influenced by:
– information quality of auction formats
• Simple design, good roles of facilitators
– implementation rules
• Multiple bidding
– perception of competitiveness
• Private costs included when submitting bids:
– farm size
– access to and quality of information
– learning behaviour across rounds (i.e. ability to adjust the bids and awareness
of competition)

C2: A fair way to allocate contracts
(accept H3)
• Auction posed fairly, but higher ex ante cost
– Capturing divergence between private and social cost
(consistent with other cases in Indonesia – Skidmore et al
2014 and Tanzania Jindal et al 2013)
• Allocating contracts to farmers who bid lower, not to
farmers with power or high-social rank
• Determining whether the farmers understand the
auction format and implementation rules

C3: Difficulties in evaluating ex ante and ex post
opportunities due to uncertainty (reject H4)
• auction process had filtered out those farmers that lacked a
good understanding and perception of the auction
– no reliable difference of conservation awareness level,
understanding on the auction design (rules, complexity),
information quality and level of satisfaction
• socio-economic characteristics of the farmers were
associated with eventual compliance
• no relationship between final round bids and the eventual
compliance

Final thoughts
• An efficient alternative to identify opportunity
cost but not a predictor of compliance
• Beyond the financial contract value, factors for
successful implementation:
– information availability to increase farmers’
understanding,
– identification of constraints to contract compliance
– an adequate balance between sanctions and
incentives

Reference
Main Source:
Leimona, B., Carrasco, L.R., in review. Does expected profit predict compliance in auctions for
payment for ecosystem services? A test case in Indonesia. Land Use Policy.
Other references:
Ajayi, O.C., Jack, B.K., Leimona, B., 2012. Auction Design for the Private Provision of Public Goods
in Developing Countries: Lessons from Payments for Environmental Services in Malawi and
Indonesia. World Development 40, 1213-1223.
Jack, B.K., Leimona, B., Ferraro, P.J., 2009. A revealed preference approach to estimating supply
curves for ecosystem services: use of auctions to set payments for soil erosion control in
Indonesia. Conservation Biology 23, 359-367.
Leimona, B., Jack, B., Lusiana, B., Pasha, R., 2009. Designing a Procurement Auction for Reducing
Sediment: A Field Experiment in Indonesia. EEPSEA Research Report 2009-RP10.
Skidmore, S., Santos, P., Leimona, B., 2014. Targeting REDD+: An Empirical Analysis of Carbon
Sequestration in Indonesia. World Development 64, 781-790.

Thank you
Contact:
Beria Leimona
L.Beria@cgiar.org
World Agroforestry Centre
ICRAF Southeast Asia Office