An Experimental Study of Transactions Costs, Liability Rules and Point-Nonpoint Source Trading in Environmental Markets

EPA Grant Number: R829609
Title: An Experimental Study of Transactions Costs, Liability Rules and Point-Nonpoint Source Trading in Environmental Markets
Investigators: Cason, Timothy N.
Institution: Purdue University
EPA Project Officer: Hahn, Intaek
Project Period: January 1, 2002 through December 31, 2003
Project Amount: $144,136
RFA: Market Mechanisms and Incentives for Environmental Management (2001) RFA Text |  Recipients Lists
Research Category: Environmental Justice


This research will conduct laboratory economics experiments to provide practical information for policymakers designing tradable emissions permit markets. The experiments address design choices such as regulatory reporting requirements and transactions costs, the initial allocation of permits, if and how nonpoint sources can participate, and liability rules in case firms fail to meet anticipated abatement goals.

The experiments will address three general research questions concerning the design of environmental markets: (1) How do transactions costs interact with the initial permit allocation mechanism to influence the overall cost-effectiveness of a tradable permits system? (2) Can permit markets for point source emitters be combined with incentive mechanisms to control nonpoint sources in order to minimize overall control costs? In particular, the experiments will determine if it is possible to combine a tradable permit system for point sources with an incentive scheme such as land use change auctions for nonpoint sources. (3) What kinds of liability rules can reduce enforcement costs when a permit seller fails to meet emission reduction commitments? The experiments will add to the growing body of environmental economic research that studies these and other details of market design.


Economics experiments involve human subjects making decisions motivated by economic profits in environments simplified to be consistent with theoretical economic models. The study design includes dozens of laboratory sessions with eight to twelve subjects in each session. The sessions are allocated to treatment cells designed to address the above research questions.

Expected Results:

This project will result in a number of publications, as articles in peer-reviewed academic journals and other outlets. The principal investigator will also report results in numerous presentations on emissions trading to a wide variety of audiences. The end result of the research funded by this grant and dissemination of these research findings will be a better understanding on the part of regulators, policymakers, researchers, and others of the potential usefulness of market mechanisms for environmental management. This will lead to a more cost-effective allocation of federal and state environmental protection resources and a better understanding of how abatement costs can be managed to address health risks and other environmental concerns.

Publications and Presentations:

Publications have been submitted on this project: View all 25 publications for this project

Journal Articles:

Journal Articles have been submitted on this project: View all 5 journal articles for this project

Supplemental Keywords:

permit allocations, air emissions, TMDL, water quality, watersheds., RFA, Economic, Social, & Behavioral Science Research Program, Scientific Discipline, Economics, Economics and Business, Market mechanisms, Social Science, financial mechanisms, market-based mechanisms, market incentives, policy instruments, effects of policy instruments, compliance behavior, policy making, impact of federal policy instruments, policy incentives, incentives, decision making, socioeconomics, enforcement and compliance, pollution fees, emissions trading, tradeable permits, allowance allocation, environmental economics, allowance market performance, marketable permits

Progress and Final Reports:

  • 2002 Progress Report
  • Final Report