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A laboratory study of auctions for reducing non-point source pollution

  • Cason, Timothy N.
  • Gangadharan, Lata
  • Duke, Charlotte

Non-point 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. This paper reports a testbed laboratory experiment in which landholder/sellers in multi-round, sealed-offer auctions compete to obtain part of a fixed budget allocated by the regulator to subsidize pollution abatement. In one treatment the regulator reveals to landholders the environmental benefits estimated for their alternative projects, and in another treatment the regulator conceals the potential projects’ “environmental quality.” The 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.

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Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 46 (2003)
Issue (Month): 3 (November)
Pages: 446-471

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Handle: RePEc:eee:jeeman:v:46:y:2003:i:3:p:446-471
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  1. Robert G. Hansen, 1988. "Auctions with Endogenous Quantity," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 44-58, Spring.
  2. Harris, Milton & Raviv, Artur, 1981. "Allocation Mechanisms and the Design of Auctions," Econometrica, Econometric Society, vol. 49(6), pages 1477-99, November.
  3. Cramton, Peter & Schwartz, Jesse A, 2000. "Collusive Bidding: Lessons from the FCC Spectrum Auctions," Journal of Regulatory Economics, Springer, vol. 17(3), pages 229-52, May.
  4. Grether, David M. & Plott, Charles R., . "The Effects of Market Practices in Oligopolistic Markets: An Experimental Examination of the Ethyl Case," Working Papers 404, California Institute of Technology, Division of the Humanities and Social Sciences.
  5. Leonardo Bartolini & Carlo Cottarelli, 1997. "Designing effective auctions for treasury securities," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 3(Jul).
  6. James T. Hong & Charles R. Plott, 1982. "Rate Filing Policies for Inland Water Transportation: An Experimental Approach," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 1-19, Spring.
  7. Cason, Timothy N. & Plott, Charles R., 1996. "EPA's New Emissions Trading Mechanism: A Laboratory Evaluation," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 133-160, March.
  8. Paul Klemperer, 2000. "What Really Matters in Auction Design," Economics Series Working Papers 2000-W26, University of Oxford, Department of Economics.
  9. John Quiggin, 1981. "Risk Perception And The Analysis Of Risk Attitudes," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 25(2), pages 160-169, 08.
  10. Bond, Gary E. & Wonder, Bernard, 1980. "Risk Attitudes Amongst Australian Farmers," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 24(01), April.
  11. Uwe Latacz-Lohmann & Carel Van der Hamsvoort, 1997. "Auctioning Conservation Contracts: A Theoretical Analysis and an Application," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 407-418.
  12. Gary E. Bond & Bernard Wonder, 1980. "Risk Attitudes Amongst Australian Farmers," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 24(1), pages 16-34, 04.
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