Spatial Coordination in Agglomeration Bonus Schemes with Transaction Costs and Communication: An Experimental Study

Simanti Banerjee (), Timothy Cason, Frans de Vries and Nick Hanley

No 2015-10, Discussion Papers in Environment and Development Economics from University of St. Andrews, School of Geography and Sustainable Development

Abstract: Agglomeration Bonus (AB) schemes reward private landowners to spatially coordinate land use decisions to enhance the supply of ecosystem services. The AB mechanism creates a coordination game with multiple Pareto ranked Nash equilibria, which correspond to different spatially-coordinated land use patterns. This paper experimentally analyses subjects’ participation decisions, land use choices and AB performance in the presence of transaction costs, with and without the option to communicate with neighboring subjects in a local network setting. The experiment varies transaction costs at two levels (high and low), which affects the risks and payoffs of coordinating on the different equilibria. Results indicate a significant difference in participation under high and low transaction costs in the early stages of the experiment. Increased experience reduces participation rates and AB performance. Costless pre-play communication induces full participation and land use choice pertaining to the efficient Nash equilibrium. If communication is costly, the level of transaction costs affects participation levels, the degree of spatial coordination, and the ecosystem services benefits produced. Our study suggests that performance of Payment for Ecosystem Services schemes in general and the AB scheme in particular can be improved through mechanisms intended to reduce the costs associated with participation and communication.

Keywords: Coordination Games; Lab Experiments; Local Networks; Payment for Ecosystem Services (search for similar items in EconPapers)
JEL-codes: C91 D81 D83 Q Q51 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2015-05
New Economics Papers: this item is included in nep-agr, nep-exp, nep-gth, nep-net and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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