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

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.

An Experimental Analysis of the Effects of Imperfect Compliance on Technology Adoption

“…Contrary to Caffera and Chávez (2016), our results show that weak enforcement significantly increases firms' real emissions for both high and low monitoring and control instruments. 18 Using a K-S test, we can reject the null hypothesis that the two samples are drawn from the same distribution comparing real emission under full and weak enforcement for the two monitoring strategies and both permits and taxes.…”

“…Murphy and Stranlund (2007) were the first to study compliance behavior of firms for both transferable permits and standards. Caffera and Chávez (2016), which is closer to our work, study the compliance behavior of firms for both transferable permits and standards. They evaluate whether a regulator can induce individual firms on a given level of emissions by using different combinations of the aggregate supply of tradable permits (or the emission standards) and the monitoring probability for both perfect and imperfect compliance scenarios.…”

Can FinTech Development Curb Agricultural Nonpoint Source Pollution?

“…In fact, it also increases the cost of governance and restricts the participation from other market players, leading to inefficient governance. Therefore, to improve the efficiency of governance, an auction mechanism should be established [34]. In this way, the distribution of licenses depends on the licensed market price, market demand, and the use of “cleaning technology”, thereby reducing distribution costs and improving governance efficiency.…”

The deterrence effect of linear versus convex fines: laboratory evidence

“…The literature that has used lab experiments to explore compliance behavior with environmental regulations is large and increasing; see for example,Cason and Gangadharan (2006),Murphy and Stranlund (2006),Murphy and Stranlund (2007),Stranlund, Murphy, and Spraggon (2011),Friesen and Gangadharan (2013),Stranlund, Murphy, and Spraggon (2013),Caffera and Chávez (2016). Reviews of the literature on enforcement and compliance with environmental regulations are presented inStranlund (2017),Shimshack (2014) andGray and Shimshack (2011).…”