An Experimental Approach to Resolving Uncertainty in Water Quality Trading Programs

Uncertainty remains problematic for pollution control in water resources due to difficulties in tracing pollution flows and uncertainty regarding future regulation. This study uses experimental techniques to evaluate how farmers in a water quality trading (WQT) market behave when they are able to resolve two issues of uncertainty: uncertainty regarding the benefits of WQT participation and uncertainty over future regulation. Experiments were conducted in the summer of 2016 with participants assigned the role of “farmer” (seller) or “wastewater treatment plant manager” (buyer) in a WQT market. In the base treatment, all farm credit generation required two units of clean-up for one pollution credit and voluntary practice implementation by farmers. In a second treatment, farmers had an opportunity to verify their true trading ratio. Preliminary results suggest that farmers will invest in verification and market outcomes typically improve. A third treatment asked farmers to implement practices voluntarily to reach a threshold to avoid regulation. Results indicate that farmers are unlikely to meet voluntary thresholds; moreover, market outcomes are worse as voluntarily abatement comes at an opportunity cost in the trading market. These results suggest an opportunity for regulators to increase participation and improve social outcomes by resolving uncertainty in WQT markets.