Getting Polluters to Tell the Truth

We study the problem of a regulator who must control the emissions of a given pollutant from a series of industries when the firms' abatement costs are unknown. We develop a mechanism in which the regulator asks firms to report their abatement costs and implements the most stringent emissions standard consistent with the firms' declarations. He also inspects one of the firms in each industry which declared the cost structure consistent with the least stringent emissions standard and with an arbitrarily small probability, he discovers whether the report was true or not. The firm is punished with an arbitrarily small fine if and only if its report was false. This mechanism is simple, is implementable in practice, its unique equilibrium is truth telling by firms, it implements the first best pollution standards and shares some features of the regulatory processes actually observed in reality.Emissions Standards, Command and Control, Undominated Nash Implementation

Energy, theory, and reality (Part Two)

Part two of two, this article compares the costs of fossil fuels/contaminating energy sources to those of renewable energy, arguing that Uruguay must shift energy production and consumption towards renewable sources

Small Incentives May Have Large Effects: The Impact of Prices on the Demand for Plastic Bags

Improper disposition of single-use plastic bags causes significant environmental impacts. Awareness of these detrimental effects has increased, according to the number of policies to reduce the consumption of plastics bags implemented worldwide. Yet, impact evaluations of these initiatives are scarce. This is particularly true for evaluations of the impact of levies on plastic bags. In this paper, we quantify, for the first time, the impact of pricing disposable plastic bags on the quantity used over a one-year time window with respect to a pre-treatment period of no regulation. Specifically, we evaluate the effect of different prices on the number of single-use plastic bags used by customers of a national supermarket chain, before and after it implemented a staggered rollout across the country. Using a difference-in-difference identification strategy, we estimate a sizable drop in the demand of single-use plastic bags in the range of 70% to 85%, compared to the control group of branches that did not price plastic bags. These estimates do not change in magnitude and are statistically robust to (i) different specifications of our basic equation, (ii) the use of synthetic controls as an alternative identification strategy, (iii) the estimation of anticipation effects, and (iv) placebo tests. We do not find evidence consistent with the effect been driven by a loss of sales. Our estimates are consistent with the evidence of large elasticities around zero prices found in other settings

Small Incentives May Have Large Effects: The Impact of Prices on the Demand for Plastic Bags

Improper disposition of single-use plastic bags causes significant environmental impacts. Awareness of these detrimental effects has increased, according to the number of policies to reduce the consumption of plastics bags implemented worldwide. Yet, impact evaluations of these initiatives are scarce. This is particularly true for evaluations of the impact of levies on plastic bags. In this paper, we quantify, for the first time, the impact of pricing disposable plastic bags on the quantity used over a one-year time window with respect to a pre-treatment period of no regulation. Specifically, we evaluate the effect of different prices on the number of single-use plastic bags used by customers of a national supermarket chain, before and after it implemented a staggered rollout across the country. Using a difference-in-difference identification strategy, we estimate a sizable drop in the demand of single-use plastic bags in the range of 70% to 85%, compared to the control group of branches that did not price plastic bags. These estimates do not change in magnitude and are statistically robust to (i) different specifications of our basic equation, (ii) the use of synthetic controls as an alternative identification strategy, (iii) the estimation of anticipation effects, and (iv) placebo tests. We do not find evidence consistent with the effect been driven by a loss of sales. Our estimates are consistent with the evidence of large elasticities around zero prices found in other settings

Mechanism Design when players' Preferences and information coincide

It is well known that when players have private information, vis a vis the designer, and their preferences coincide it is hard to implement the socially desirable outcome. We show that with arbitrarily small fines and arbitrarily noisy inspections, the social choice correspondence can be fully implemented (truth telling is the unique Nash equilibrium)

Uncertain Penalties and Compliance

We present the results of a series of laboratory economic experiments designed to study compliance behavior of polluting firms when information on the penalty is uncertain. The experiments consist of a regulatory environment in which university students face emission standards and an enforcement mechanism composed of audit probabilities and penalties (conditional on detection of a violation). We examine how uncertainty on the penalty affects the compliance decision and the extent of violation under two enforcement levels: one in which the regulator induces perfect compliance and another one in which it does not. Our results suggest that in the first case, uncertain penalties increase the extent of the violations of those firms with higher marginal benefits. When enforcement is not sufficient to induce compliance, the uncertain penalties do not have any statistically significant effect on compliance behavior. Overall, the results suggest that a cost-effective design of emission standards should consider including public and complete information on the penalties for violations

Uncertain Penalties and Compliance

We present the results of a series of laboratory economic experiments designed to study compliance behavior of polluting firms when information on the penalty is uncertain. The experiments consist of a regulatory environment in which university students face emission standards and an enforcement mechanism composed of audit probabilities and penalties (conditional on detection of a violation). We examine how uncertainty on the penalty affects the compliance decision and the extent of violation under two enforcement levels: one in which the regulator induces perfect compliance and another one in which it does not. Our results suggest that in the first case, uncertain penalties increase the extent of the violations of those firms with higher marginal benefits. When enforcement is not sufficient to induce compliance, the uncertain penalties do not have any statistically significant effect on compliance behavior. Overall, the results suggest that a cost-effective design of emission standards should consider including public and complete information on the penalties for violations

¿Estudiar Economía te Hace más Egoísta?

We present students of different careers from the University of Montevideo (Uruguay) to a hypothetical situation in which, as vice-president of a company, have to make a decision that involves a trade-off between economic benefits and number of employees fired. The paper is a replica of the survey conducted by Rubinstein (2006). Our results do not allow us to reject the hypothesis that students who choose to study economics are more geared to maximizing benefits prior to entry to university, against the alternative of "Indoctrination", whereby students just decide to maximize profits after exposure to economic theory

The deterrence effect of linear versus convex penalties in environmental policy: laboratory evidence

We study the individual compliance behavior of polluting firms in an experimental setting under two different penalty functions (a linear and a strictly convex) and two different regulatory instruments (emission standards and tradable pollution permits). We find that a convex penalty, as compared to a linear penalty, increases the market price of pollution permits and the violation rate of firms. The effect of the structure of the fine on the price of permits operates through an increase in the ask-prices of sellers, not on the bids by suppliers. With convex penalties, sellers are not willing to sell a permit at a price as low as with linear penalties. We do not observe an effect of convex penalties on the compliance status of firms with emission standards. These results call for attention on the possible effect that the type of penalties may have on the cost-effectiveness of pollution control programs based on tradable pollution permits