Green auctions: A biodiversity study of mechanism design with externalities

This paper uses a mechanism design approach to study the biodiversity improvement in a territory, where the government is the principal and the landholders are the agents. In particular, I analyze an optimal mechanism that considers multidimensional bid which includes both the biodiversity improvement of the project and its cost. Additionally, this mechanism incorporates the externality (either positive or negative) that a biodiversity project causes in the surrounding agents who decided not to participate. Specifically, I assume that externalities enter in the cost function of the nonparticipating landholders. I show that, in the case of negative externalities, the government will implement a transfer function which is decreasing in the landholder's efficiency level. On the other hand, in the case of a positive externality, paradoxically the government may be interested in the nonparticipation of the most efficient landholders.