Conservation Program Design

Participant Bidding Enhances 

Cost Effectiveness

Robert Johansson

Much of USDA conservation policy relies on voluntary, incentive-payment programs. These programs are designed to encourage farmers to undertake conservation efforts that address resource

concerns on their farms. However, to spend program dollars cost-effectively, program managers

must motivate farmers to offer to participate, then select those applicants who offer the greatest

environmental gain per dollar spent.

Bidding is one way to do that. Conservation program managers solicit contract offers (bids) from

farmers, and interested farmers compete for enrollment by submitting bids. Bids can convey critical information that program managers would not otherwise have, including who is willing to participate, what land and practices they will offer, what resource concerns they are offering to

address, and the dollar amount they will accept to participate. When the cost to enroll all interested farmers exceeds available funding, bidding allows program managers to select the best applicants by comparing contract offers—projected conservation benefits versus costs as submitted.

This ensures that final program participants are those who will maximize taxpayers’ investment in

conservation effort.
ECONOMIC BRIEF Participant Bidding Enhances Cost Effectiveness

UNITED STATES DEPARTMENT OF AGRICULTURE 2

Bidding Provides Information on Conservation Costs and Benefits

The bidding process is analogous to a homeowner who solicits construction bids. Different contractors

will likely propose offers that differ in terms of cost, expedience, quality, amenities, and durability. Based

on various financial constraints, zoning requirements, and architectural preferences, the homeowner will

weigh these offers and select the best fit. Similarly, a program manager might have a good idea of how

much a conservation practice might cost on average, but the likely environmental benefits provided and

which farmers will submit a bid for enrollment at a particular incentive rate are generally not known until

after program implementation.

In this situation, payments could be set at a fixed rate and contracts could be accepted until program funds

were exhausted (“first come, first served”). Or program managers could harness competition with a

signup that asks farmers to submit bids. Depending on the program, bids may specify what conservation

practices a farmer will install, on what land, at what price, and over what period. Different programs have

different rules about how bids are specified and weighted, but each bid generally includes information

about costs and benefits.

Costs –Farmers could “bid for cost,” or agree to accept a lower incentive payment for a given practice(s)

in hopes of being enrolled. However, accurate cost estimates for certain practices are elusive and time

consuming for both program managers and farmers.

Benefits –Farmers could “bid for benefits,” offering the practice(s) and field(s) that provide the greatest

(perceived) environmental benefit. When actual benefits are unknown, a proxy value (like the

Environmental Benefits Index (EBI)) can be used by program managers.

In a competitive program (one where the budget is not sufficient to enroll all interested participants), the

program manager could rank the bids according to costs, benefits, or both. To stretch the available budget and to maximize environmental gain, the manager would favor contracts with the highest benefits relative to costs.

Bidding is Used in CRP and EQIP

Two prominent U.S. conservation programs have used flexible bidding rules to enroll the most cost-effective contracts. These are the Conservation Reserve Program (CRP, with a 2004 budget of $1.9 billion) and

the Environmental Quality Incentives Program (EQIP, with a 2004 budget of $0.9 billion).

Conservation Reserve Program 

The CRP initially focused on retiring highly erodible cropland. Farmers often enrolled less productive

land and received annual payments above market rental rates for that land. Beginning in the early 1990s,

the USDA began selecting land for CRP enrollment based on the Environmental Benefits Index (USDAFarm Service Agency, 2004). The EBI accounts for offsite damages of soil erosion and recognizes other

environmental benefits, particularly wildlife habitat. EBI points are now assigned based on several environmental categories and a cost factor. The majority of the EBI score is due to site-specific characteristics (e.g., slope of the field, leaching potential of the soil, location in a wildlife priority area). Farmers

could therefore offer those fields for enrollment that have the highest site-specific scores (i.e., bidding for

benefits). Moreover, farmers could increase the attractiveness of their bids by agreeing to establish better

wildlife habitat, such as planting native grasses rather than domestic varieties. Farmers could also increase

the attractiveness of their bids by lowering the rental rate for their fields, known as “offering a discount”

(i.e., bidding for costs).

Program managers use both benefit and cost information to enroll the bids with the highest EBI score.

Between 1997 and 2003, farmers offering discounts had, on average, lower site-specific EBI scores than

those not offering discounts, suggesting that bidding for costs improved farmers chances of being

enrolled (table 1). However, the proportion of farmers offering a discount has declined over time, even

though the amount of the discount offered has generally increased.

Voluntary conservation

payment programs need to

specify who is eligible to

receive payments, how much

can be received, for what

actions, and the means by

which applicants are selected.

The achievement of program

goals in a cost-effective manner hinges on the choices 

policymakers and program

managers make when 

answering these questions.

This Economic Brief is

one in a set of five exploring

specific design options these

decisionmakers face:

(1) income support versus

environmental objectives,

(2) alternative ways to target

programs,

(3) the use of bidding in

determining payment

levels,

(4) land retirement and

conservation on 

working lands, and 

(5) payments for conservation practices versus the

level of environmental

performance.

Available at www.ers.usda.gov/

publications/eb1, . . ./eb2,

. . ./eb3, . . ./eb4, and . . ./eb5
Why are fewer farmers offering discounts over time, when competition is increasing? It may be that offering fields for enrollment that are inherently more attractive to program managers (i.e., bidding for benefits) is becoming a more successful strategy. Fields enrolled from 1997 to 2003 had much higher site-specific scores than fields that were not enrolled, regardless of whether a discount was offered (table 1). Also,

fewer farmers may be offering discounts because program rental rates under CRP have been largely constant since 1997, while market rental rates have increased, reducing landowners’ willingness to offer a further discount.

Environmental Quality Incentives Program (EQIP) 

Before 2002, EQIP applicants were able to both lower their request for program payments (bid for costs)

and offer a suite of conservation practices on selected fields (bid for benefits). During 1997-2001, broad

eligibility and modest funding ($200 million/year) resulted in a very competitive program. In 1997 and

1998, roughly 70 percent of EQIP applicants were rejected. Bids for cost-share rates (the reimbursement

rate requested by farmers for implementing conservation practices) were low relative to maximum allowable rates. For structural practices (e.g., animal waste handling systems or grassed waterways), farmers

could request up to 75 percent of the cost, but the mean accepted cost-share rate was only 35 percent.

For management practices (e.g., nutrient management, conservation tillage), producers could request up

to 100 percent of the (county) maximum incentive payment rate for the practice, but the mean accepted cost-share rate was only 43 percent (table 2).

Some farmers requested lower cost-share rates because many structural/management practices funded by

EQIP produced private benefits. As such, even at the lower cost-share rates, farmers still broke even or

offset production costs that they would have borne anyway. For example, waste storage facilities may be

part of a livestock feeder’s plan for complying with local or State waste handling requirements. Sprinkler

irrigation systems that conserve water also reduce pumping costs. Pasture planting can improve grass

cover and reduce erosion, but will also increase grazing productivity. Similarly, conservation tillage, irrigation water management, prescribed grazing, and nutrient management may reduce production costs

through careful management of production inputs.

3

Table 1—Contract acres for CRP enrollment (1997–2003)

Acres Share of Acres offered Mean Site-specific EBI

Year Signup (mil.) acres offered with discount discount With discount W/o discount

Acres enrolled in CRP1:

1997 15 16.17 71% 57% 2.99 197 200

1997 16 5.92 65% 53% 6.68 198 209

1998 18 4.99 73% 36% 4.89 184 194

2000 20 2.46 73% 38% 5.80 183 194

2003 26 2.00 49% 31% 7.16 231 230

Acres offered, but not enrolled in CRP:

1997 15 6.49 29% 70% 5.01 153 155

1997 16 3.19 35% 48% 6.38 167 171

1998 18 1.81 27% 42% 5.67 153 161

2000 20 0.89 27% 41% 6.31 149 159

2003 26 2.06 51% 27% 6.49 181 181

Source: Economic Research Service analysis of CRP data.

1The site-specific EBI score measures the base environmental attributes of a candidate field and

does not account for proposed discounts or environmental enhancements.
ECONOMIC BRIEF Participant Bidding Enhances Cost Effectiveness

4 ECONOMIC RESEARCH SERVICE

Strong competition among applicants may also have encouraged farmers to offer multiple practices on their

bid, thereby enhancing their environmental score. Subsequently, many proposed practices were never implemented (which does not carry a penalty but does lessen the payment received). Between 1997 and 2001, 17

percent of EQIP contracts had one or more practice withdrawn (Cattaneo, 2003). Such behavior reduces

environmental gain from expected levels and may lower program cost effectiveness.

Modeling Bidding and Cost Effectiveness

Evidence from CRP and EQIP suggests that bidding for costs can help increase the cost effectiveness

of conservation programs—i.e., lowering the amount of financial assistance going toward farmers’

efforts to install and manage conservation practices. Similarly, evidence from CRP illustrates how bidding

for benefits can increase cost effectiveness by enrolling fields that provide greater environmental benefits. By collecting cost and benefit information from farmers prior to enrollment, program managers can

maximize environmental benefits for a given conservation budget. Because there is little information

available to compare gains in cost-effectiveness via bidding versus nonbidding designs, two hypothetical

conservation programs (at different scales) help illustrate how program managers can use bidding to distribute conservation funds effectively.

Consider a conservation program designed to encourage

farmers to use no-till residue

management (no-till) on cropland in a multicounty region.

No-till leaves a large percentage

of harvested crop residue on a

field in order to reduce the

amount of sediment and fertilizer runoff, enhancing nearby

water quality. Suppose this program either offers participants a

flat rate for adopting no-till, or

solicits bids on the level of

financial assistance farmers

would be willing to accept

(WTA) to implement no-till. In

Evidence from CRP and

EQIP suggests that bidding for costs can help

increase the cost effectiveness of conservation

programs.

Farms

(acres)

Payment rate ($/acre)

20

 

100

(40,000)

A

10

F

B

 87

 (34,800)

C

Figure 1

Acres of no-till management

Table 2—EQIP best management/structural practices (1997–2001)

Selected management Mean cost Mean cost 

practices share rate (%) Selected structural practices share rate (%)

Conservation crop rotation 60 Waste storage facility 40

No-till/ Strip till 53 Fence 35

Mulch till 58 Sprinkler irrigation systems 42

Cover crop 27 Pasture/hay planting 45

Residue management 26 Pipeline (livestock water) 18

Irrigation water management 39 Irrigation water pipeline 42

Prescribed grazing 46 Brush management 29

Nutrient management 48 Grade stabilization structure 39

Pest management 45 Pond 38

All management practices 43 All structural practices 35

Source: Economic Research Service analysis of EQIP data.
ECONOMIC BRIEF Participant Bidding Enhances Cost Effectiveness

UNITED STATES DEPARTMENT OF AGRICULTURE 5

this example, suppose there are 100 farmers willing to adopt no-till on their 400-acre farms at an incentive rate of $10 to $20 per acre, depending on individual farm conditions ($10 <_ WTA <_ $20). Line (F)

in fig. 1 represents the hypothetical distribution of farms and their WTA to adopt no-till. (In a real world

situation, it is likely that farms would not be distributed in such a uniform fashion along a straight line;

there would likely be many small farms and fewer large farms with different WTA.) 

If the program manager offered a flat payment of $20 per acre to any farmer willing to adopt no-till, the

noncompetitive program would be able to enroll all interested farmers. (Area A+B+C would represent

the total cost of such a program: $20 per acre × 40,000 acres = $800,000.) Yet, we know that many farmers would have been willing to adopt no-till for less than $20 per acre. In this example, area (A) represents the amount of payments in excess of farmers’ WTA for adopting no-till. These excess payments

essentially support farm incomes (see Economic Brief No. 1).

Suppose now that the program manager has a limited budget of $500,000. Given a flat payment rate of $20

per acre to any producer willing to adopt no-till on their fields, enrollment on a first-come, first-served

entitlement basis would result in 63 farms and 25,000 acres being enrolled. As one alternative, the program

manager could offer the same $20 per acre and collect all the bids from farmers. Selecting those who bid for

the most benefits, the program manager could enroll those farms that would likely result in the greatest environmental benefit for enrollment (e.g., farms on highly sloped lands or near water resources). The program

manager would still enroll 25,000 acres on 63 farms, but not necessarily the same farms as before.

Instead, suppose the program manager solicits bids from these same farmers, but asks them to indicate how

much they would be willing to accept to adopt no-till. The program manager could then select those who

bid for the lowest cost (with a cutoff of $10 per acre) and enroll up to 87 farms and 34,800 acres with no-till

for the same $500,000 budget (area B in figure 1). However, these acres might not necessarily generate the

same aggregate benefits as before.

In this example, a farmer’s probability of being accepted into a conservation program is heightened by

agreeing to accept lower payments to implement a conservation practice or by agreeing to enroll fields

likely to generate the greatest benefits from no-till residue management. In either case, the information

gathered by soliciting bids results in cost savings over a “first-come, first-served” approach.

Bidding for costs and benefits can also increase the cost effectiveness of a conservation program when

multiple regions and practices are involved. At a national level, farmers can improve the environmental

performance of their cropland (in response to incentive payments) using a broad slate of conservation

practices—nutrient management, no-till residue management, conservation rotations, etc. Using an empirical model of U.S. agriculture and its environmental impacts, farmer responses to two types of program

designs (funded at $500 million) are simulated: one that

allows bidding for benefits

only (using a fixed-rate incentive payment) and one that

allows bidding for both benefits and costs. Improvements

in environmental performance on farms are measured

in a number of ways (reduced

soil erosion, increased soil

productivity, etc.) and are represented in aggregate using

environmental points, similar

to the EBI. The simulations

suggest that farmers could

enhance environmental performance on cropland by

At a national level, farmers can improve the

environmental 

performance of their

cropland (in response to

incentive payments)

using a broad slate of

conservation practices.

Figure 2

Program budget and environmental performance

0

200

400

600

800

1,000

0 50 100 150 200

Simulated improvement in environmental performance (million points)

Source: Cattaneo et al., 2005

Bidding for benefits 

Bidding for benefits 

and costs

Simulated program cost ($million)
ECONOMIC BRIEF Participant Bidding Enhances Cost Effectiveness

6 ECONOMIC RESEARCH SERVICE

approximately 91 million points (or by 8.5 percent) if they were offered $5.50 per point and allowed to bid

for benefits (fig. 2). On the other hand, if farmers were asked to submit bids for both benefits and costs,

the program could generate the same environmental benefits at half the cost (about $250 million)—at an

average cost of $2.75 per point. At a funding level of $500 million, bidding for benefits and costs could

generate nearly 130 million benefit points (an average cost of $3.90 per point)—an increase in cost effectiveness of about 30 percent when “bidding down” costs are allowed.

Practical Considerations

Many program design decisions will influence a program’s performance. For example, larger farms may

have lower average costs of installing practices than smaller farms, raising equity issues in selecting program participants. Or certain farms may have greater potential to enhance wildlife habitat, whereas others may be more suited to addressing water quality issues. Selecting bids for enrollment is difficult when

a program pursues multiple objectives (environmental or otherwise) that are not easily compared.

However, these considerations are generally important for voluntary conservation programs, with or

without bidding for costs and benefits.

In addition, the more flexible a program is regarding farmers’ choice of structural or management practices to bid for costs (lowering the amount of payment they require) and benefits (increasing the number

of practices eligible to generate environmental benefits), the more cost effective the program generally

will be. However, by allowing more flexibility, program managers will expend more time and effort in

developing estimates of the resulting environmental benefits and in providing technical assistance to interested farmers. Farmers will also have to spend more time estimating how much various practices will cost

to implement and which combination of practices on which fields will provide them the best chances for

enrollment. If these transaction costs are high, farmers may be reluctant to participate and/or program

managers may not have sufficient resources to select cost-effective contracts.

Bidding In Sum

For a program with limited funds, bidding provides program managers benefit and cost information to

select cost effective contracts, enables interested farmers to compete for enrollment, and can enhance cost

effectiveness. To maximize the advantages of bidding in conservation programs (i.e., to reduce program

costs and increase environmental benefits), both bidding for costs and bidding for benefits would need to

be included. In many cases, bidding for benefits is already in place. Farmers and program managers have

a good idea of which fields and which practices will generate the most benefits. Bidding for benefits is

already evident in State-level ranking procedures for EQIP contracts. Bidding for costs in EQIP was

discontinued in 2002 amid concerns about the ability of producers with limited financial resources to

compete effectively for EQIP enrollment. Aside from distributional concerns, however, bidding has

significant potential to increase the environmental cost effectiveness of conservation programs.

So it is bidding for costs, allowing farmers to submit the payment levels they would require under their

contract, that holds the most untapped potential for enhancing conservation program cost effectiveness.

If farmers compete for limited funds through such bidding, the cost effectiveness of the enrolled contracts would be higher. Furthermore, the cost to program managers of determining the appropriate payment levels for eligible practices on participating farms would be much lower. The end result would be

more environmental gains for each conservation dollar spent.

THE U.S. DEPARTMENT OF AGRICULTURE IS AN EQUAL OPPORTUNITY PROVIDER AND EMPLOYER

For more information, see www.ers.usda.gov/abouters/privacy.htm

Cattaneo, A. 2003. “The Pursuit

of Efficiency and Its

Unintended Consequences:

Contract Withdrawals in the

Environmental Quality

Incentives Program,” Review of

Agricultural Economics 25(2):

449-469.

Cattaneo, A., R. Claassen, R.

Johansson, and M. Weinberg.

2005. Flexible Conservation

Measures on Working Land: What

Challenges Lie Ahead? U.S. Dept.

Agr., Econ. Res. Serv., ERR-5,

June.

USDA-Farm Service Agency.

2004. “Conservation Reserve

Program Sign-up 29:

Environmental Benefits Index,”

online report, available at

http://www.fsa.usda.gov/pas/pu

blications/facts/

html/crp29ebi04.htm (last

accessed September 9, 2005).

USDA-Natural Resources

Conservation Service. 2005.

“Environmental Quality

Incentives Program (EQIP)

FY2005 Application Information

by State,” available at

http://www.nrcs.usda.gov/

programs/eqip/EQIP_signup/2

005_EQIP/index.html (last

accessed September 16, 2005).

This brief is drawn from . . .