Laboratory Test of a Non-Point Water Pollution Control Program: Monetary and Psychological Incentives

Abstract

This paper reports the results of laboratory test of the performance of a non-point source (NPS) water pollution abatement scheme suggested by Pushkarskaya and Randall (2006). The scheme is based on voluntary participation in the non-point source pollution control program, and ties individual payoffs to collective performance of the farmers in the watershed. First, we formulate the set of predictions based on both monetary (traditionally used by economists) and psychological (usually studied by psychologists) incentives on how the contract will perform in laboratory in four different settings with undergraduate students as subjects. Then we test these predictions. The experimental data demonstrated that predictions based on both monetary and psychological incentives are very accurate. Specifically, the participation in the program was high, and on average players chose strategies that were close to pay-off dominant, which caused the overall efficiency of the contract to be sufficiently high. However, since the scheme created simultaneously incentives for spitefulness, free-riding, altruism and negative reciprocity the efficiency of a contract was influenced by the composition of groups in terms of players' social types in the settings with no uncertainty. However, in the settings with production and weather uncertainty present, the performance of the scheme was not sensitive to the composition of groups in terms of players' social types. All these results, however, were obtained in the lab with undergraduate students as subjects. At the end of the paper we provide a short discussion on what effects might still hold in the field.