Naughty or nice? Punishment and the interaction of formal and informal incentives in long-term contractual relationships

The paper develops a model of repeated interaction between a buyer and a seller, which is then tested via laboratory experiments. The model allows for both formal and informal incentives in the contractual relationship between the parties. Formal incentives are explicit, performance-conditioned obligations enforced by third parties, such as a binding bonus paid for meeting an objectively measurable criterion. Informal incentives are non-binding promises to reward good performance. Although they are not enforced by external institutions, parties engaged in long-term interactions have incentives to “keep their words” about these promises and such payments can provide motivation for desirable performance. The current literature posits that these two types of incentives can function either as complements, so that joint use leads to better outcomes than either alone, or as substitutes, so that the availability of formal incentives may actually undermine the effectiveness of informal incentives. This study uses laboratory experiments to provide a rigorous test of hypotheses about the interaction of these incentives. The observed results suggest that the complementarity effect occurs in certain situations, but that the substitution effect does not occur as predicted, possibly because people do not punish transgressions in the manner that the theoretical model assumes.Relational contracts, experimental economics

Efficient Compensation for Regulatory Takings and Oregon's Measure 37

Replaced with revised version of paper 08/03/07.Resource /Energy Economics and Policy,

Nonpoint Source Abatement Costs in the Kentucky River Watershed

A growing share of water pollution in the U.S. can be attributed to nonpoint sources (USEPA 2002). Some of this trend can be attributed to declining point source (PS) emissions as a result of regulation under the Clean Water Act (CWA). However, fertilizer-intensive practices used to improve agricultural productivity over recent decades have also increased nitrate loads and resulted in water quality impairments. Nonpoint source (NPS) pollution from agricultural practices is generally exempt from federal regulation. However, some voluntary programs allow point sources subject to the CWA’s effluent limitations to meet their standards by purchasing offset credits reflecting reductions in NPS discharges to the same waters (USEPA 2004). Such water quality trading (WQT) programs have been implemented in a number of states to reduce pollution abatement costs (Breetz et al 2004). In this setting, NPS supply pollution abatement when they implement best management practices (BMP) that reduce nutrient loads, and the cost of BMPs form a supply curve for credits. WQT programs are supported by the EPA as an important means for efficiently pursuing water quality goals (USEPA 2003a). Among the BMPs available for water quality management, riparian buffer strips have proven effective in mitigating the movement of nutrients and other pollutants into surface waters (Qiu et al 2006). Estimates of riparian buffer costs would be valuable for developing policy related to WQT and other conservation programs. This paper estimates the annual costs of buffer strips in six counties in the Lower Kentucky River Basin, as part of a project evaluating the feasibility of WQT programs in that area.Environmental Economics and Policy,

Naughty or nice? Punishment and the interaction of formal and informal incentives in long-term contractual relationships

The paper develops a model of repeated interaction between a buyer and a seller, which is then tested via laboratory experiments. The model allows for both formal and informal incentives in the contractual relationship between the parties. Formal incentives are explicit, performance-conditioned obligations enforced by third parties, such as a binding bonus paid for meeting an objectively measurable criterion. Informal incentives are non-binding promises to reward good performance. Although they are not enforced by external institutions, parties engaged in long-term interactions have incentives to “keep their words” about these promises and such payments can provide motivation for desirable performance. The current literature posits that these two types of incentives can function either as complements, so that joint use leads to better outcomes than either alone, or as substitutes, so that the availability of formal incentives may actually undermine the effectiveness of informal incentives. This study uses laboratory experiments to provide a rigorous test of hypotheses about the interaction of these incentives. The observed results suggest that the complementarity effect occurs in certain situations, but that the substitution effect does not occur as predicted, possibly because people do not punish transgressions in the manner that the theoretical model assumes

Desert Farming Benefits from Microbial Potential in Arid Soils and Promotes Diversity and Plant Health

BACKGROUND: To convert deserts into arable, green landscapes is a global vision, and desert farming is a strong growing area of agriculture world-wide. However, its effect on diversity of soil microbial communities, which are responsible for important ecosystem services like plant health, is still not known. METHODOLOGY/PRINCIPAL FINDINGS: We studied the impact of long-term agriculture on desert soil in one of the most prominent examples for organic desert farming in Sekem (Egypt). Using a polyphasic methodological approach to analyse microbial communities in soil as well as associated with cultivated plants, drastic effects caused by 30 years of agriculture were detected. Analysing bacterial fingerprints, we found statistically significant differences between agricultural and native desert soil of about 60%. A pyrosequencing-based analysis of the 16S rRNA gene regions showed higher diversity in agricultural than in desert soil (Shannon diversity indices: 11.21/7.90), and displayed structural differences. The proportion of Firmicutes in field soil was significantly higher (37%) than in the desert (11%). Bacillus and Paenibacillus play the key role: they represented 96% of the antagonists towards phytopathogens, and identical 16S rRNA sequences in the amplicon library and for isolates were detected. The proportion of antagonistic strains was doubled in field in comparison to desert soil (21.6%/12.4%); disease-suppressive bacteria were especially enriched in plant roots. On the opposite, several extremophilic bacterial groups, e.g., Acidimicrobium, Rubellimicrobium and Deinococcus-Thermus, disappeared from soil after agricultural use. The N-fixing Herbaspirillum group only occurred in desert soil. Soil bacterial communities were strongly driven by the a-biotic factors water supply and pH. CONCLUSIONS/SIGNIFICANCE: After long-term farming, a drastic shift in the bacterial communities in desert soil was observed. Bacterial communities in agricultural soil showed a higher diversity and a better ecosystem function for plant health but a loss of extremophilic bacteria. Interestingly, we detected that indigenous desert microorganisms promoted plant health in desert agro-ecosystems

Efficient Compensation for Regulatory Takings and Oregon's Measure 37

In 2004, an Oregon referendum passed Measure 37, a law requiring compensation for, or waiver of, land-use regulations that decrease property values. A key question is whether this form of compensation for regulatory takings achieves economic efficiency. This paper shows that it does not under a reasonable set of assumptions. Following the recent law-and-economics literature on regulatory takings, this paper uses a two-agent principal-agent model in which the government makes a regulatory decision, the property-owner chooses investment level and/or land use, and the outcome is evaluated from the perspective of social welfare. An efficient rule would provide incentives both for the government to make socially optimal regulatory decisions and for the property-owner to make socially optimal decisions regarding investment in and use of the land. The paper shows that a full-compensation rule similar to Measure 37 can induce efficient decisions under a relatively simple model. The paper then extends the model by introducing factors brought to light by the form of Measure 37's compensation scheme and Oregon's early experiences under the law, including budgetary limits and limits on taxation. In this extended model, the Measure 37 rule is shown to lead to inefficiency in the form of under-regulation