Handbook on Experimental Economics and the Environment
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Handbook on Experimental Economics and the Environment

Edited by John A. List and Michael K. Price

Laboratory and field experiments have grown significantly in prominence over the past decade. The experimental method provides randomization in key variables therefore permitting a deeper understanding of important economic phenomena. This path-breaking volume provides a valuable collection of experimental work within the area of environmental and resource economics and showcases how laboratory and field experiments can be used for both positive and normative purposes.
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Chapter 9: Imperfect enforcement of emissions trading and industry welfare: a laboratory investigation

John K. Stranlund, James J. Murphy and John M. Spraggon


Much of what we understand about the advantages of emissions trading programs, particularly vis-à-vis traditional command and control approaches, is based on models of full compliance with these policies. However, emissions trading policies are not likely to perform as expected if these programs are not enforced well. Recognizing this concern, there is now a significant body of theoretical literature on the consequences of imperfect enforcement of emissions trading programs (e.g. Malik 1990, 1992; Keeler 1991; Stranlund and Dhanda 1999; Stranlund 2007). While the theory of the compliance and enforcement problem in emissions trading has advanced quite far, there are few empirical investigations of compliance behavior and the performance of emissions markets under imperfect compliance. The dearth of empirical research in this area is due to the fact that opportunities for empirical analyses of imperfect enforcement in existing trading programs are limited. In situations in which naturally occurring data are limited, laboratory experiments are particularly valuable. In fact, several recent papers use experiments to examine various aspects of imperfect compliance in emission trading programs (Cason and Gangadharan 2006; Murphy and Stranlund 2006, 2007). These works provide valuable results about the compliance behavior of subjects in experimental emissions permit markets, but none deal directly with the effects of noncompliance on the social costs and benefits of these programs. In this study, we use the data from a series of emissions trading experiments to examine the impacts of imperfect enforcement on industry welfare. By imperfect enforcement we mean that enforcement efforts – monitoring and penalties – are not sufficient to induce full compliance by all firms.

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