Now showing 1 - 2 of 2
ItemEmissions variability in tradable permit markets with imperfect enforcement and bankingCason, Timothy ; GANGADHARAN, LATA ( 2004-09)Unexpected variation in emissions can have a substantial impact on the prices and efficiency oftradable emission permit markets. In this paper we report results from a laboratory experiment inwhich subjects participate in an emissions trading market in the presence of emissionsuncertainty. Subjects face exogenous, random positive or negative shocks to their emission levelsafter they make production and emission control plans. In some sessions we allow subjects tobank their unused permits for future use. In all sessions, subjects can trade in a reconciliationperiod to buy or sell extra permits following the shock realization. Subjects then report theiremissions to the regulatory authority and they are placed in different inspection groupsdepending on their compliance history. The design of our experiment allows us to identifyimportant interactions between emission shocks, banking, compliance and enforcement. We findthat the relationship between emission shocks and price changes is significantly stronger withoutbanking, so banking helps smooth out the price variability arising from the imperfect control ofemissions. This greater price stability comes at a cost, however, since noncompliance andemissions are significantly greater when banking is allowed.
ItemAn Experimental Study of Compliance and Leverage in Auditing and RegulatoryEnforcementCason, Timothy ; GANGADHARAN, LATA ( 2004-09)Evidence suggests that a large majority of firms and individuals comply with regulationsand tax laws even though the frequency of inspections and audits is often low. Moreover, finesfor noncompliance are also typically low when regulatory violations are discovered. Theseobservations are not consistent with static compliance models. Harrington (1988) modified thesestatic models by specifying a dynamic game in which some agents have an incentive to complyeven when the cost of compliance each period is greater than the expected penalty. This paperreports a laboratory experiment based on the Harrington model framework, in which subjectsmove between two inspection groups that differ in the probability of inspection and severity offine. Subjects decide to comply or not in the presence of low, medium or high compliance costs.Enforcement leverage arises in the Harrington model from movement between the inspectiongroups based on previous observed compliance and noncompliance. Our results indicate thatconsistent with the model, violation rates increase when compliance costs become higher and asthe probability of switching groups becomes lower. Behavior does not change as sharply as themodel predicts, however, since violation rates do not jump from 0 to 1 as parameters vary acrosscritical thresholds. A simple model of bounded rationality explains these deviations from optimalbehavior.