Economics - Research Publications

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Type: Preprint × Subject: C91 - Laboratory × Subject: Laboratory Experiments ×

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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.