Exogenous Targeting Instruments under Differing Information Conditions

This paper tests the ability of an exogenous targeting instrument to induce compliance when the principal cannot observe the actions of individual agents. A number of papers show that although these instruments are able to induce groups to the target outcome, they are not able to induce individuals to make socially optimal decisions in a number of different controlled laboratory experiments. This study investigates whether the information individuals have about others’ payoffs affects how they make their decisions in this environment. Ledyard (1995) suggests that when subjects have less information in public goods experiments they are more likely to choose the Nash equilibrium decision. However, as he points out, this effect differs between groups with homogeneous and heterogeneous payoff functions. The results show that reducing information reduces efficiency although there are no significant effects on the absolute level of group decisions at the aggregate level. At the individual level, reducing the information players have complicates the environment resulting in subjects choosing either lower decision numbers or more randomly. Moreover, these effects seem to be more serious for subjects whose Nash decisions are on the boundary of the decision space.Moral Hazard in Groups, Exogenous Targeting Instruments, Experiments, Information

Exogenous Targeting Instruments with Heterogeneous Agents

This paper investigates the ability of ambient pollution instruments to induce a group of heterogeneous agents to choose a target outcome. Six controlled laboratory sessions were conducted with heterogeneous agents facing ambient pollution instruments with lump sum or proportional fines and bonuses. Sessions are compared with a study of these exogenous targeting instruments and homogenous agents using complete information and certainty [25]. The data show that contracts can indeed be developed that induce heterogeneous groups to choose the target outcome; however, substantial inefficiency and inequality were observed.

Exogenous Targeting Instruments as a Solution to Group Moral Hazards

The ability of four contracts within the general class of exogenous targeting instruments, proposed by Segerson (1988), to induce socially optimal outcomes in a group moral hazard environment is investigated in an experiment based on Nalbantian and Schotter (1987). Both contracts based on the Holmstrom (1982) forcing contract with multiple equilibria, and contracts based on the Segerson study with unique equilibria are tested. My result -- that contracts can be designed that mitigate the moral hazard problem at the aggregate level -- is a significant advance on the result of Nalbantian and Schotter -- that costly monitoring or competitive teams are required to solve the moral hazard problem. It is shown that this result is robust to uncertainty as well as experience. However, none of the contracts insures compliance at the individual level, and as a result hefty fines may be accrued by individuals even when they choose the socially optimal action.

An Experimental Analysis of Compliance in Dynamic Emissions Markets

Two important design elements for emission trading programs are whether and to what extent firms are able to bank emissions permits, and how these programs are to be enforced. In this paper we present results from laboratory emissions markets designed to investigate enforcement and compliance when these markets allow permit banking. Banking is motivated by a decrease in the aggregate permit supply in the middle of multi-period trading sessions. Consistent with theoretical insights, our experiments suggest that high permit violation penalties have little deterrence value in dynamic emissions markets, and that the main challenge of enforcing these programs is to motivate truthful self-reports of emissions.compliance, enforcement, emissions trading, laboratory experiments, permit markets, permit banking

Imperfect Enforcement of Emissions Trading and Industry Welfare: A Laboratory Investigation

This paper uses laboratory experiments to investigate the performance of emission permit markets when compliance is imperfectly enforced. In particular we examine deviations in observed aggregate payoffs and expected penalties from those derived from a model of risk-neutral payoff-maximizing firms. We find that the experimental emissions markets were reasonably efficient at allocating individual emission control choices despite imperfect enforcement and significant noncompliance. However, violations and expected penalties were lower than predicted when these are predicted to be high, but were about the same as predicted values when these values were predicted to be low. Thus, although a standard model of compliance with emissions trading programs tends to predict significantly higher violations than we observe when subjects have strong incentives to violate their emissions permits, individual emissions control responsibilities are distributed among firms as predicted.enforcement, compliance, emissions trading, permit markets, pollution, laboratory experiments

Thin and lumpy: an experimental investigation of water quality trading

Water quality trading schemes in the United States can predominantly be characterized by low trading volumes. In this paper we utilize laboratory economics experiments to explore the extent to which the technology through which pollution abatement is achieved influences market outcomes. Mirroring the majority of water quality trading markets, the sessions utilize small trading groups composed of six participants. To understand the extent to which abatement technology influences trading behavior, the experimental treatments vary the degree of heterogeneity in initial abatement costs and the potential for long-lived investments in cost-reducing abatement technology.Environmental Economics and Policy,

Can auctions control market power in emissions trading markets.

Using eight sessions (twenty-four ten-period markets) in a double ABA cross-over design, we demonstrate clear evidence of market power in double-auction emission trading markets (agents who are not constrained to only buy or sell). Conventional theory predicts that in half of the market-power environments monopsony should emerge and in half monopoly should emerge. Market-power outcomes are frequently observed, most often in the form of price discrimination, and most effectively by monopsonists.

Comparing the Effectiveness of Regulation and Pro-Social Emotions to Enhance Cooperation: Experimental Evidence from Fishing Communities in Colombia

This paper presents the results from a series of framed field experiments conducted in fishing communities off the Caribbean coast of Colombia. The goal is to investigate the relative effectiveness of exogenous regulatory pressure and pro-social emotions in promoting cooperative behavior in a public goods context. The random public revelation of an individual’s contribution and its consequences for the rest of the group leads to significantly higher public good contributions and social welfare than regulatory pressure, even under regulations that are designed to motivate fully efficient contributions.

The Problem of Maintaining Compliance within Stable Coalitions: Experimental Evidence

This study examines the performance of stable cooperative coalitions that form to provide a public good when coalition members have the opportunity to not comply with their commitments. A stable coalition is one in which no member wishes to leave and no non-member wishes to join. To counteract the incentive to violate their commitments, coalition members fund a third-party enforcer. This leads to the theoretical conclusion that stable coalitions are larger (and provide more of a public good) when their members must finance enforcement relative to when compliance is ensured without the need for costly enforcement. However, our experiments reveal that giving coalition members the opportunity to violate their commitments while requiring them to finance enforcement to maintain compliance reduces the overall provision of the public good. The decrease in the provision of the public good is attributed to an increase in the participation threshold for a theoretically stable coalition to form and to significant levels of noncompliance. When we abandon the strict stability conditions and require all subjects to join a coalition for it to form, the average provision of the public good increases significantly. Key Words: stable coalitions, self-enforcing agreements, compliance, enforcement, public goods

Does Government Regulation Complement Existing Community Efforts to Support Cooperation? Evidence from Field Experiments in Colombia

In this paper we describe a field experiment conducted among mollusk harvesters in a community on the Pacific Coast of Columbia. The experiment is based on a standard linear public good and consists of two stages. In the first stage we compare the ability of monetary and nonmonetary sanctions among community members to increase contributions to the public good. In the second stage we add a government regulation with either a high or low sanction for noncompliance to community enforcement efforts. The results for the first stage are consistent with other comparisons of monetary and nonmonetary sanctions within groups; both led to higher contributions. The results from the second stage reveal that government regulations always complemented community enforcement efforts. While the subjects tended to reduce their sanctioning efforts under the government regulations, contributions and earnings were significantly higher than without government interventions. In fact, the combination of community and government enforcement efforts generated near-perfect contributions to the public good. However, more research into the combined roles of government intervention and community enforcement efforts is needed because the complementarity we find may be situation-specific.Field experiments, public goods, government regulation, community enforcement