Quality information and market segmentation in auctions for reducing nonpoint source pollution

Abstract

Auctions have the potential to improve the cost-effectiveness of nonpoint source pollution abatement to which applying the polluter pays principle is difficult. Laboratory experiments have shown that revealing the environmental impacts of reducing polluting inputs to nonpoint sources (potential sellers) leads to the deterioration of auction performance. The auction mechanism that simultaneously achieves cost-effectiveness and transparency for reducing nonpoint source pollution remains unclear. Through a laboratory experiment, I find that although the disclosure of information on environmental impacts deteriorates auction performance, contrary to theoretical predictions, market segmentation improves performance and cancels out these impacts.