Grantee Research Project Results
2002 Progress Report: An Experimental Study of Transactions Costs, Liability Rules and Point-Nonpoint Source Trading in Environmental Markets
EPA Grant Number: R829609Title: 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 Period Covered by this Report: 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
Objective:
The objectives of this research project are to: (1) report a testbed laboratory experiment in which landholders/sellers in sealed-offer auctions compete for part of a fixed, allocated budget; and (2) investigate the auctions’ potential for nonpoint pollution control.
Progress Summary:
Nonpoint source pollution, such as nutrient runoff to waterways from agricultural production, is an environmental problem that typically involves asymmetric information. Land use changes to reduce pollution incur opportunity costs that are privately known to landholders, but these changes provide environmental benefits that may be more accurately estimated by regulators.
The first manuscript generated by this project reports a testbed laboratory experiment in which landholders/sellers in sealed-offer auctions compete to obtain part of a fixed budget allocated by the regulator to subsidize abatement. In one treatment, the regulator reveals to landholders the environmental benefits estimated for their projects, and in another treatment, the regulator conceals the potential projects' "environmental quality." Preliminary results show that sellers' offers misrepresent their costs more for high-quality projects when quality is revealed, so total abatement is lower and seller profits are higher when landholders know their projects' environmental benefits. This suggests that concealing this information may improve regulatory efficiency.
The second manuscript investigates the potential of auctions for nonpoint pollution control. Auctions may permit the regulator to identify those management changes that have greater environmental benefit and lower opportunity cost. One treatment employs uniform price auction rules in which the price is set at the lowest price per unit of environmental benefits submitted by a seller who had all offers rejected, so sellers have an incentive to offer their projects at cost. Another treatment employs discriminative price rules that are not incentive compatible, because successful sellers receive their offer price. Our results indicate that subjects recognize the cost-revelation incentives of the uniform price auction as a majority of offers are within 3 percent of cost. By contrast, a majority of offers in the discriminative price auction are at least 10 percent greater than cost. But the regulator spends more per unit of environmental benefit in the uniform price auction, and the discriminative price auction has superior overall market performance.
The project has proceeded on schedule. Data collection is nearly complete for the laboratory auctions for land use change to address nonpoint source pollution, and two manuscripts have been completed and are described below. The final experimental sessions for the auctions are scheduled for early August 2003.
Future Activities:
Future activities involve software development and the experimental design that are nearly complete for the second phase of the project, which will use laboratory methods to study: (1) compliance with environmental regulations under targeted enforcement based on Harrington (1988, Journal of Public Economics); and (2) compliance in, and performance of, emissions trading markets with transactions costs and emissions uncertainty. Data collection is scheduled for fall 2003 and winter 2004, with manuscript preparation and presentation during 2004 (anticipated presentations at the Economic Science Association Conference and the Association of Environmental and Resource Economists Conference).
Journal Articles on this Report : 1 Displayed | Download in RIS Format
| Other project views: | All 25 publications | 5 publications in selected types | All 5 journal articles |
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Cason TN, Gangadharan L, Duke C. A laboratory study of auctions for reducing non-point source pollution. Journal of Environmental Economics and Management 2003;46(3):446-471. |
R829609 (2002) R829609 (Final) |
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Supplemental Keywords:
testbed, landholders/sellers, environmental quality, nonpoint source pollution., RFA, Scientific Discipline, Economic, Social, & Behavioral Science Research Program, Economics, Market mechanisms, Social Science, Economics and Business, financial mechanisms, allowance market performance, marketable permits, pollution fees, socioeconomics, market incentives, emissions trading, policy making, policy instruments, effects of policy instruments, policy incentives, tradeable permits, incentives, compliance behavior, environmental economics, impact of federal policy instruments, allowance allocation, market-based mechanisms, decision making, enforcement and complianceProgress and Final Reports:
Original AbstractThe perspectives, information and conclusions conveyed in research project abstracts, progress reports, final reports, journal abstracts and journal publications convey the viewpoints of the principal investigator and may not represent the views and policies of ORD and EPA. Conclusions drawn by the principal investigators have not been reviewed by the Agency.