Prices versus Standards and Firm Behavior: Evidence from an Artefactual Field Experiment

An artefactual field experiment is conducted using 166 experienced managers and senior advisors recruited from the chemical, pulp and paper, electricity, heating, and steel industries in Sweden. The experiment presented a strongly incentivized cost minimization task framed as an abatement investment decision in a hypothetical firm. Subjects were randomized into two treatments, and they made decisions in the presence of an emissions tax or an emissions standard. Treatments were calibrated to generate no treatment effects if subjects’ decisions are consistent with the predictions of rational choice theory. The results show that emissions standards reduce managers’ attentional focus on cost minimization, causing them to choose the most cost-effective alternative less often than is predicted by rational choice theory. Although the emissions tax significantly increased managers’ focus on monetary information, managers tended to minimize average abatement costs, resulting in abatement levels lower than optimal levels and marginal costs lower than tax levels. The results demonstrate that the type of policy instruments per se can induce decision-making bias via attentional focus, even when decision makers are experienced managers and senior advisors.