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The Regulatory Choice of Noncompliance in the Lab: Effect on Quantities, Prices, and Implications for the Design of a Cost-Effective Policy

Author

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  • Caffera Marcelo

    (Departamento de Economía, Universidad de Montevideo, Prudencio de Pena 2544, Montevideo 11600, Uruguay)

  • Chávez Carlos

    (Departamento de Economía, Research Nucleus in Environmental and Natural Resource Economics, and Interdisciplinary Center for Aquaculture Research (INCAR), Universidad de Concepción, Concepción, Chile)

Abstract

Recent theoretical developments show the conditions under which it is cost-effective for the regulator to induce perfect compliance in cap-and-trade programs. These conditions are based on the ability that a regulator with perfect information has to induce the firms to emit any desired level with different combinations of the number of permits supplied to the market and the monitoring probability, assuming that firms are expected profit maximizers. In this paper, we test this hypothesis with a series of laboratory experiments. Our results suggest that firms may behave significantly different from what these models predict precisely when the different combinations of the supply of permits and the monitoring probability induce compliance versus noncompliance. More specifically, by allowing noncompliance in a manner consistent with theory, the regulator could produce a decrease in emissions and an increase in the market price of tradable permits that is not predicted by the theoretical models. The implications for the cost-effective design of environmental policy are discussed.

Suggested Citation

  • Caffera Marcelo & Chávez Carlos, 2016. "The Regulatory Choice of Noncompliance in the Lab: Effect on Quantities, Prices, and Implications for the Design of a Cost-Effective Policy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 727-753, April.
    • Handle: RePEc:bpj:bejeap:v:16:y:2016:i:2:p:727-753:n:2
    DOI: 10.1515/bejeap-2014-0202
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    References listed on IDEAS

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    1. Davis, Douglas D. & Holt, Charles a., 1993. "Experimental economics: Methods, problems and promise," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 8(2), pages 179-212.
    2. Marcelo Caffera & Carlos Chávez, 2011. "The Cost-Effective Choice of Policy Instruments to Cap Aggregate Emissions with Costly Enforcement," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 50(4), pages 531-557, December.
    3. Murphy, James J. & Stranlund, John K., 2007. "A laboratory investigation of compliance behavior under tradable emissions rights: Implications for targeted enforcement," Journal of Environmental Economics and Management, Elsevier, vol. 53(2), pages 196-212, March.
    4. Carmen Arguedas, 2008. "To Comply or Not To Comply? Pollution Standard Setting Under Costly Monitoring and Sanctioning," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 41(2), pages 155-168, October.
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    Citations

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    Cited by:

    1. Lidia Vidal-Meliá & Carmen Arguedas & Eva Camacho-Cuena & José Luis Zofío, 2022. "An Experimental Analysis of the Effects of Imperfect Compliance on Technology Adoption," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 81(3), pages 425-451, March.
    2. Carol Luengo & Marcelo Caffera & Carlos Chávez, 2020. "Uncertain penalties and compliance: experimental evidence," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 22(2), pages 197-216, April.
    3. Carol Luengo & Marcelo Caffera & Carlos Chávez, 2014. "Uncertain Penalties and Compliance," Documentos de Trabajo/Working Papers 1407, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    4. Song Jiang & Shuang Qiu & Hong Zhou & Meilan Chen, 2019. "Can FinTech Development Curb Agricultural Nonpoint Source Pollution?," IJERPH, MDPI, vol. 16(22), pages 1-22, November.
    5. Wang, M. & Zhou, P., 2022. "A two-step auction-refund allocation rule of CO2 emission permits," Energy Economics, Elsevier, vol. 113(C).

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    More about this item

    Keywords

    emission standards; emissions trading; enforcement; environmental policy; laboratory experiments;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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