Can market segmentation improve the performance of water quality trading auction? A laboratory experiment

Abstract

This study addresses the problem of improving the performance of water quality trading auctions when information about delivery coefficients of nonpoint sources is revealed to potential sellers. We consider the case in which a regulator participating in an auction market as a buyer of water quality credits segments the market using information about the delivery coefficients of nonpoint sources participating as sellers and configurations representing the sellers' set of cost distributions. We examine whether market segmentation can reduce sellers' rent-seeking and improve market performance through a laboratory experiment and investigate the robustness of the results to the configuration. The results show that market segmentation can improve the performance of water quality trading auctions when the share of potential sellers with high delivery coefficients is large. However, the effect varies depending on the configuration.