Economics - Research Publications

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    Emissions variability in tradable permit markets with imperfect enforcement and banking
    Cason, 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.
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    An Experimental Study of Compliance and Leverage in Auditing and RegulatoryEnforcement
    Cason, 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.
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    Investment decisions and emissions reductions: results from experiments in emissions trading
    GANGADHARAN, LATA ; Farrell, Alex ; Croson, Rachel ( 2005-07)
    Emissions trading is an important regulatory tool in environmental policy making.Unfortunately the effectiveness of these regulations is difficult to measure in the field due to theunavailability of appropriate data. In contrast, experiments in the laboratory can provideguidance to regulators and legislatures about the performance of different market features inemission trading programs. This paper reports on the implementation of three differentinstitutional designs, and presents experimental results investigating important features ofemissions trading regimes: the ability to make investments in emissions abatement, ability tobank allowances and a declining emissions cap, both with and without uncertainty. Thesefeatures are observed in virtually all existing air pollution emissions trading programs currentlyin place and will almost certainly be part of future applications. Like previous experimentalstudies of emissions trading, this paper shows that the efficiency gains expected from economictheory emerge observationally. We also show reduced efficiency when permits are bankable dueto over-banking and when investments in emissions abatement are possible due to overinvesting.These tendencies do not worsen, however, when emissions caps decline.
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    Do Attitudes Towards Corruption Differ Across Cultures?Experimental Evidence from Australia, India, Indonesia andSingapore
    CAMERON, LISA ; Chaudhuri, Ananish ; ERKAL, NISVAN ; GANGADHARAN, LATA ( 2005-07)
    This paper examines cultural differences in attitudes towards corruption by analysingindividual-decision making in a corrupt experimental environment. Attitudes towards corruptionplay a critical role in the persistence of corruption. Our experiments differentiate between theincentives to engage in corrupt behaviour and the incentives to punish corrupt behaviour andallow us to explore whether, in environments characterized by lower levels of corruption, there isboth a lower propensity to engage in corrupt behaviour and a higher propensity to punish corruptbehaviour. Based on experiments run in Australia (Melbourne), India (Delhi), Indonesia (Jakarta)and Singapore, we find that there is more variation in the propensities to punish corruptbehaviour than in the propensities to engage in corrupt behaviour across cultures. The resultsreveal that the subjects in India exhibit a higher tolerance towards corruption than the subjects inAustralia while the subjects in Indonesia behave similarly to those in Australia. The subjects inSingapore have a higher propensity to engage in corruption than the subjects in Australia. Wealso vary our experimental design to examine the impact of a more effective punishment systemand the effect of the perceived cost of bribery.
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    Impact of risk and uncertainty in the provision of local and global environmental goods: an experimental analysis
    GANGADHARAN, LATA ; NEMES, VERONIKA ( 2005-11)
    Uncertainties and risks in the decision making process are abundant in the area ofenvironmental economics, irrespective of whether the problems being discussed are local orglobal. This paper uses laboratory evidence from public goods games to examine how inpayoff equivalent situations, decision makers contribute towards local or globalenvironmental goods, in the presence of risk and uncertainties in the provision of these goods.We use a within subject design that allows for comparisons across seven different treatmentsin which subjects are exposed to internal (strategic) and external (environmental) risk anduncertainty. Our results show that the location of the risk and uncertainty matters, withsubjects moving away from the external uncertainty in favor of internal uncertainty, whenthat uncertainty is associated with the local environmental good. When the uncertainty relatesto the global environmental good, subjects face both external and internal uncertainty on thesame good leading to a significant drop in contributions. We find that in the presence of riskand uncertainty subjects use feedback from other members of their group when decidingabout future contributions. The reward for research and development and innovation iscaptured in the experimental design by the increased probability of obtaining the desiredoutcome in the endogenous probability treatment. Subjects seem to understand this incentiveand contribute more towards global goods in this treatment.