Timothy N. Cason

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

Abstract 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 sealed-offer auctions compete to obtain part of a fixed budget allocated by the regulator to subsidize abatement. In one treatment the regulator reveals to landholders the environmental benefits estimated for their 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.

Price formation in double auction markets

Abstract This paper reports 14 laboratory experiments that examine existing theories of the price formation process in the continuous double auction. The experiments feature random values and costs, and therefore a new price formation observation each period. We find that efficiency is high and rises with experience in this environment. We also find that trades with greater exchange surplus tend to occur earlier in the period, that increased trader experience reduces an anomalous intertemporal arbitrage opportunity observed previously, and that only when traders are very experienced does exchange surplus accrue disproportionately to the side of the market with a smaller number of traders.

Communication and Efficiency in Competitive Coordination Games

Costless pre-play communication has been found to effectively facilitate coordination and enhance efficiency in games with Pareto-ranked equilibria. We report an experiment in which two groups compete in a weakest-link contest by expending costly efforts. Allowing intra-group communication leads to more aggressive competition and greater coordination than control treatments without any communication. On the other hand, allowing inter-group communication leads to less destructive competition. As a result, intra-group communication decreases while inter-group communication increases payoffs. Our experiment thus provides an example of an environment where communication can either enhance or damage efficiency. This contrasts sharply with experimental findings from public goods and other coordination games, where communication always enhances efficiency and often leads to socially optimal outcomes.

Indirect Punishment and Generosity Toward Strangers

Cheaper Cooperation In the context of public goods games in which optimal benefit is achieved when all participants contribute, bad behavior cannot always be deterred by direct punishment, and has the added disadvantage that the punisher may suffer a cost. Alternatively, instead of punishment, rewarding those who contribute can be effective in encouraging and maintaining widespread cooperation, with the added plus that group benefits are not diminished by the costs of punishment. But Ule et al. (p. 1701) discovered experimentally that if someone is treated depending on how they have behaved in previous interactions, retaining the option to occasionally apply punishment shifts the payouts to favor cooperators more than defectors. Frequent rewards spiced with occasional punishment are a recipe for the evolution of cooperation. Many people incur costs to reward strangers who have been kind to others. Theoretical and experimental evidence suggests that such “indirect rewarding” sustains cooperation between unrelated humans. Its emergence is surprising, because rewarders incur costs but receive no immediate benefits. It can prevail in the long run only if rewarders earn higher payoffs than “defectors” who ignore strangers’ kindness. We provide experimental evidence regarding the payoffs received by individuals who employ these and other strategies, such as “indirect punishment,” by imposing costs on unkind strangers. We find that if unkind strangers cannot be punished, defection earns most. If they can be punished, however, then indirect rewarding earns most. Indirect punishment plays this important role, even if it gives a low payoff and is rarely implemented.

A Laboratory Comparison of Uniform and Discriminative Price Auctions for Reducing Non-point Source Pollution

Auctions allow regulators to identify land management changes with substantial environmental benefit and low opportunity cost. This paper reports an experiment in which seller subjects compete in sealed-offer auctions to obtain part of a fixed budget allocated by the experimenter-regulator to subsidize pollution abatement. One treatment employs uniform-price auction rules, whereas another treatment employs discriminative price auction rules. We find that most offers in the uniform-price auction are within 2% of cost, whereas most offers in the discriminative price auction are at least 8% greater than cost. Nevertheless, the discriminative-price auction has superior overall market performance. (JEL C91, Q15)

Cheap talk price signaling in laboratory markets

Abstract This paper uses laboratory posted offer markets to investigate the market impact of non-binding price signals. U.S. airlines have recently attracted antitrust attention due to their shared electronic pricing system. This system may facilitate collusion by allowing airlines to signal pricing intentions to their rivals and build consensus on fare actions. The airlines often posted fare proposals through the system before they were available for sale, so the proposals were non-binding ‘cheap talk.’ In the experiment sellers frequently use signals, increasing prices in some circumstances. However, the signals lose their impact over time, which suggests that price signaling does not lead to new behavioral equilibria.

Secure Implementation Experiments:Do Strategy-proof Mechanisms Really Work?

Strategy-proofness, requiring that truth-telling is a dominant strategy, is a standard concept used in social choice theory. Saijo et al. (2003) argue that this concept has serious drawbacks. In particular, announcing ones true preference may not be a unique dominant strategy, and almost all strategy-proof mechanisms have a continuum of Nash equilibria. For only a subset of strategy-proof mechanisms do the set of Nash equilibria and the set of dominant strategy equilibria coincide. For example, this double coincidence occurs in the Groves mechanism when preferences are single-peaked. We report experiments using two strategy-proof mechanisms where one of them has a large number of Nash equilibria, but the other has a unique Nash equilibrium. We found clear differences in the rate of dominant strategy play between the two.

Market power in tradable emission markets: a laboratory testbed for emission trading in Port Phillip Bay, Victoria

In theory, competitive emission permit markets minimise total abatement cost for any emission ceiling. Permit markets are often imperfectly competitive, however, if they are thin and dominated by large firms. The dominant firm(s) could exercise market power and increase other firms’ costs of pollution control, while reducing their own emission control costs. This paper reports a testbed laboratory experiment to examine whether a dominant firm can exercise market power in a permit market organised using the double auction trading institution. Our parameters approximate the abatement costs of sources in a proposed tradable emissions market for the reduction of nitrogen in the Port Phillip Watershed in Victoria, Australia. We vary across treatments the initial (pre-trade) allocation of permits to sources, so that in one treatment the seller of permits is a monopolist and in another treatment the selling side of the market is duopolistic. We also vary the information that subjects have about the number and abatement costs of their competitors. We find that prices and seller profits are higher and efficiency is lower on average in the monopoly sessions compared to the duopoly sessions, but the differences are not substantial and are not statistically significant due to pronounced variation across sessions. Moreover, prices, profits and transaction volumes are usually much closer to the competitive equilibrium than the monopoly equilibrium.

Winner-Take-All and Proportional-Prize Contests: Theory and Experimental Results

This study provides a unified framework to compare three canonical types of contests: winner-take-all contests won by the best performer, winner-take-all lotteries where probability of success is proportional to performance, and proportional-prize contests in which rewards are shared in proportion to performance. We derive equilibria and observe outcomes from each contest in a laboratory experiment. Equilibrium and observed efforts are highest in winner-take-all contests. Lotteries and proportional-prize contests have the same Nash equilibrium, but empirically, lotteries induce higher efforts and lower, more unequal payoffs. Behavioral deviations from theoretical benchmarks in different contests are caused by the same underlying attributes, such as risk-aversion and the utility of winning. Finally, we find that subjects exhibit consistent behavior across different types of contests, with subjects exerting higher effort in one contest also exerting higher effort in another contest.

Non-Excludable Public Good Experiments

We conduct a two-stage game experiment with a non-excludable public good. In the first stage, two subjects choose simultaneously whether or not they commit to contributing nothing to provide a pure public good. In the second stage, knowing the other subject’s commitment decision, subjects who did not commit in the first stage choose contributions to the public good. We found no support for the evolutionary stable strategy equilibrium, and the ratio of subjects who did not commit to contributing nothing increased as periods advanced; that is, the free-riding rate declined over time. Furthermore, this behavior did not arise due to altruism or kindness among subjects, but from spiteful behavior of subjects.