Experimental Markets for Connecting Ecosystem Services to Consumers' Values and

Decision Support

Stephen K. Swallow(University of Connecticut, after Jan. 1, 2011)

Acknowledgment

• Collaborators at URI– Emi Uchida– Chris M. Anderson– Elizabeth C. Smith

• EcoAsset Markets Inc.

• RI Ag Experiment Station• NOAA Marine Resource

Economics Fellowship

Conservation Innovation Grant

National Science Foundation

USDA/AFRI, NIFA

Ecosystem Services often Public Goods:The Challenge

• Examples– Cultural services (open space, bird watching)– Some supporting services (habitat)– Some regulating services (climate mitigation)– Some provisioning services (watershed supply)

• “Free ride” or “cheap ride” vs. personal benefit• Result: limited business potential

– Need to capture consumer value

Ecosystem Services Outside Markets

• Missing markets cause existing markets to:– forget what citizens value, – which damages ecosystems valuable to all,– without enough offsetting benefits

• Valuation aids central decision-makers,but

Can we capture consumer values directly?

• Critical need:– rules of exchange that reduce free riding,

enable providers to benefit • Ideal market would:

– Balance value to everyone (sum of benefits)– versus the costs of provision

Example 1: Selling Farm Ecosystem Services

• For-profit farm product– Grassland bird habitat– Bobolinks on hayfields– Farm contract– Sell share to residents

• Pay farmers for management to protect nesting birds

Experimental Market

• A deliverable public good– Late May to early July:

• Hay at peak nutritional value• Bobolinks / grassland birds nesting

• Pay farmers to delay hay harvest• Beneficiaries: Residents who value

landscape, wildlife or ecosystem health

Experiment Testing Provision-Point Mechanisms (PPMs)

• Establish “Provision Point” = Farm Contract Cost= minimum target for funds

• Money back guarantee: tie payment to product

• Identified group of potential beneficiaries– Exurban residents

• Provision Point + MBG = threat of non-provision

Mechanism 1: Proportional Rebate (PR)

• Broker solicits pledges from individuals• If group’s total pledges exceed contract cost, then

provide bobolink field• Individuals pay only the proportion needed to

cover the contract cost• If group pledged $5000 and contract cost is only

$3000, then individuals pay 60% of their pledge (or receive a rebate of 40%).

Mechanisms 2 & 3: Price Caps (UPA, UPC)

• Broker solicits pledges from individuals• Broker calculates “price cap”

= smallest max payment that raises revenue, pays contract costs, and delivers a bobolink field

• Individuals pay no more than the price cap– Uniform Price Auction (UPA) – pay only the price cap if

your offer is higher, pay zero otherwise– Uniform Price Cap (UPC) - pay either the price cap or

your pledge, whichever is lower

Incentives to Raise Revenue

• Reduce cost of pledging beyond marginal need

• Separate pledge and final payment• Fair?

– Price caps: All payers face uniform cap– Prop. rebate: All pay same share of value

• Address reactions to rebates/refunds

Mechanism 4: Pivotal Mechanism (PM)

• Incentive compatible: measures value• Individual pays only if she is “pivotal”

– Only pays if her pledge of $Xi would be the one that pushes the group over the top.

– Incentives assure person pays only “when necessary” so “pledge your full value” such that “any higher and you’d rather do without”

Newspaper Advertisement

Trademark

Web Site

Brochure for Direct Mail Marketing

Request for payment

• Dichotomous choice (yes/no to fixed price from $20, 35, 80, 120)

• Or payment card (circle amount) – $20 or more– $35 or more

Implementation – Response

• March-April (2007-08) • 2 mailings + reminder• About 2750 deliverable homes

– 2007: 371 respond, 189 offers = $9700– 2008: 212 respond, 143 offers = $6800

Payment or WTP Regression: Final

• DC (Yes/No choice) significant

= +$30 vs open ended• UPA payments lower

= -$14 lower• Field characteristics may

matter – (+ 8 to 20 fledglings x 3.253)

• Income (+), mail order (-)

Variable Coef. z

acres 0.557 0.52

view from road 6.977 1.23

NBobolinkTerritories -4.206 -1.40

NFledglings 3.253 2.00

DC (yes/no) 29.750 3.91

oehigh 8.995 1.22

UPA (1,0) -14.720 -2.00

lnPPow10No (Income) 14.328 2.54

AgeNoMis 0.149 0.38

DonateAnyNoMis 2.285 0.28

MailOrderKidsNoMis -24.810 -3.10

IncomeMissing 65.848 1.34

DonateEnviroNoMis 12.561 1.28

DonateEnviroHealthMis 11.995 0.55

imrgrand 57.922 1.74

imrgrand08 -28.812 -2.43

_cons -132.086 -1.57

/sigma_u 49.788 13.46

/sigma_e 23.675 17.93

rho 0.816

Percentage of 2008 Participants WTP > Amount, in Discrete Choice

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0 10 20 30 40 50 60 70 80 90 100Amount ($)

Perc

enta

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ProportionalRebatePivotalMechanismUniform PriceAuctionUniform PriceCap

70%

$62

$56

$52

Projected 2008 Revenue per 100 Participants in 2008, with Discrete Choice

0

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0 10 20 30 40 50 60 70 80 90 100Amount ($)

Rev

enue

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ProportionalRebatePivotalMechanismUniform PriceAuctionUniform PriceCap

Discussion: Research Agenda

• Long-run performance– Will offers degrade toward free-riding over time?

• Public frame of reference– Use of excess funds: Extra field, second field

• Guide public investment in conservation• Challenge of Fluid, arms-length market

Identifying individualized prices• Bundling multiple ecosystem services

Production Ecology

• Production of ecosystem services• Ability to attract bobolinks via audio calls (behavioral ecology)• Rotations for birds and hayfield quality (farmer concerns)• Restoration of idle fields

• How will market affect ecosystem services in long term, with what side effects?– Carbon farming versus habitat diversity and

landscape aesthetics

Example 2Virginia Coastal Reserve(VCR): Selling Sea Grass and Coastal Bird Habitat

• Experimental auctions for ecosystem restoration

•Accomack and Northampton Counties

•Field experiments with groups of 20-50.

•Lab experiments with groups of 8-20.

Market Incentive Methods to Enable New Business Development

• Individualized prices known to balance benefits and costs of providing public goods– Translate theory for practical application by

business• Patent application: REVENUE RAISING

AUCTION PROCESSES FOR PUBLIC GOODS

Economists “ideal market” for Public Goods –non-excludable, benefit many people simultaneously

Quantity (e.g., environmental restoration)

$ per unit

But for Public Goods: Society’s value (benefit)= sum of individual values = marginal cost

A

Basic economics: Balance of “Demand and Supply” or “Marginal Benefit and Marginal Cost” of delivery

Economists “ideal market” for Public GoodsMarginal Balance: sum of individual values vs cost

Quantity (e.g., environmental restoration)

$ per unit

A

Quantity (e.g., environmental restoration)

$ per unit

A

Individualized prices equal marginal values

Person’s value ($/unit)

Restoration Units (to be provided)

Process – soliciting individual bids

Manager asks person’s value with Rule of Proportional Rebate

Manager evaluates offers relative to cost of delivery:Given all offers, can provide at “green” price with rebate

Consider next unit – solicit offers; recalculate rebates.

Process continuesUntil manager cannot provide a “next unit”. She then calculates a final level of provision, sets a constant price with rebates

VCR Research/Experiment Overview

• Field Experiment • Ask individuals to “name your own price” at

quantities delivered– Half-acres (1,2,3,…,8) of sea grass restoration– Half-acres (1,2,3,…,8) of coastal bird habitat

restoration

For this section, you have a budget of $100 to make each decision with Questions 18 a-d are specifically about sea grass restoration activities only. Please circle your decisions for the allocation of your personal budget for each incremental unit of sea grass restoration activities. You should circle one dollar value in each column, a-d. Q.18 (a) (b) (c) (d)

Per Unit

Prices ($) 1 Increment 2 Increments 3 Increments 4 Increments 0 pay 0 keep 100 pay 0 keep 100 pay 0 keep 100 pay 0 keep 100 5 pay 5 keep 95 pay 10 keep 90 pay 15 keep 85 pay 20 keep 80 10 pay 10 keep 90 pay 20 keep 80 pay 30 keep 70 pay 40 keep 60 15 pay 15 keep 85 pay 30 keep 70 pay 45 keep 55 pay 60 keep 40 20 pay 20 keep 80 pay 40 keep 60 pay 60 keep 40 pay 80 keep 20 25 pay 25 keep 75 pay 50 keep 50 pay 75 keep 25 pay 100 keep 0 30 pay 30 keep 70 pay 60 keep 40 pay 90 keep 10

33.33 pay 33.33 keep 66.67 pay 66.67 keep 33.33 pay 100 keep 0 35 pay 35 keep 65 pay 70 keep 30 40 pay 40 keep 60 pay 80 keep 20 45 pay 45 keep 55 pay 90 keep 10 50 pay 50 keep 50 pay 100 keep 0 55 pay 55 keep 45 60 pay 60 keep 40 65 pay 65 keep 35 70 pay 70 keep 30 75 pay 75 keep 25 80 pay 80 keep 20 85 pay 85 keep 15 90 pay 90 keep 10 95 pay 95 keep 5 100 pay 100 keep 0

On these graphs, each line represents cash offers from one individual for each “unit” of restoration. 1 unit = 0.5 acres. The top line shows the maximum offer possible ($100 for 1 unit; $50 for 2 units, etc.)(2008)

Marginal Willingness to Pay Bids (mWTP, 2008)(Individualized Price per half-acre of restoration)

1 $59 $652 $48 $413 $37 $30

4 $26 $32

Per unit valuation:Linear; Quadratic

Variable affecting mWTP

B (SE) Linear

model

P< B (SE) quadratic

model

P<

Constant 70.18(3.209)

0.001 101.4(6.5802)

0.001

Number of units

-11.18(1.120)

0.001 -43.17(6.007)

0.001

DummyCondition’l

9.701(2.507)

0.001 9.415 (2.403)

0.001

Number of units squared

-- -- 6.462 (1.200)

0.001

LR chi2(df)

93.47(2)

0.0001 121.50(3)

0.0001

Units (no. of half-acres)

0 1 2 3 4 5 6 7 8

Bird habitat (Baseline vote)

0 $58 $53 $47 $41 $35 $29 $24 $18

Bird habitat (Auction process)

0 $81 $44 $30 $23 $19 $16 $14 $11

Seagrass (Baseline vote)

0 $50 $44 $39 $33 $27 $21 $16 $10

Seagrass (Auction Process)

0 $68 $42 $28 $23 $19 $16 $13 $10

Estimated marginal willingness to pay from baseline vote model versus mean bids in auction process ($ / half-acre) (2009 data).

Proportional Rebate (PR) versus Pivotal Mechanism (PM) set of marginal incentives for soliciting bids for auction process. Experimental auction participants could buy

up to 4 or 8 half-acre units.

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1 2 3 4 5 6 7 8

Number of half-acre units to which individual's bid applies.

Ave

rag

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PM(4)PR(4)PM(8)PR(8)

Future Directions

• Explore effects of science information • Present how restoration affects people • Next steps:

– Test at market business scale – Adapt for decision support at current scale– Enhance connection to natural science of

production actions and for marketing

Markets for Consumer Values

• How can we expect people to buy separately packaged ecosystem services?

• Create packages– Use Menu or Combinatorial Auctions to identify high-value

packages• Use Consumer Values to drive “cap” for “cap and trade”

approaches– Consumer-citizens can buy permits, but retire them, until view

benefits balanced with costs• Use Consumer Auctions to drive allocation of public funds

We can connect consumer values directly to ecosystem services or restoration.

Thank you.Questions?