Market Mechanisms and Incentives: Applications to Environmental Policy PROCEEDINGS SESSION FIVE EXPERIMENTAL METHODS A WORKSHOP SPONSORED BY THE US ENVIRONMENTAL PROTECTION AGENCY’S NATIONAL CENTER FOR ENVIRONMENTAL ECONOMICS

Land use changes to reduce non-point source pollution, such as nutrient runoff to waterways from agricultural production, incur opportunity costs that are privately known to landholders. Auctions may permit the regulator to identify those management changes that have greater environmental benefit and lower opportunity cost. This paper reports a testbed laboratory experiment in which landowner/sellers compete in sealed-offer auctions to obtain part of a fixed budget allocated by the regulator to subsidize pollution abatement. 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 of her 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. JEL Classification: C91, Q15, Q28