RESEARCH PAPER NO. 882

A LABORATORY COMPARISON OF UNIFORM AND DISCRIMINATIVE PRICE AUCTIONS FOR REDUCING NON-POINT SOURCE POLLUTION

BY

TIMOTHY N. CASON & LATA GANGADHARAN

OCTOBER 2003

Department of Economics. University of Melbourne. Melbourne Victoria 3010 Australia

Land use changes to reduce non-point source pollution, such as nutrient runoff to waterways from agricultural production, incur opportunity costs that are privately known to landholders.  Auctions may permit the regulator to identify those management changes that have greater environmental benefit and lower opportunity cost.  This paper reports a testbed laboratory experiment in which landowner/sellers compete in sealed-offer auctions to obtain part of a fixed budget allocated by the regulator to subsidize pollution abatement. One treatment employs uniform price auction rules in which the price is set at the lowest price per unit of environmental benefits submitted by a seller who had all of her offers rejected.  Another treatment employs discriminative price rules in which successful sellers receive their offer price.  Our results indicate that subjects recognize the cost-revelation incentives of the uniform price auction, as a majority of offers are within 2 percent of cost. By contrast, a majority of offers in the discriminative price auction are at least 8 percent greater than cost.  Nevertheless, the regulator spends more per unit of environmental benefit in the uniform price auction, and the discriminative price auction has superior overall market performance.