Market Segmentation in Auctions for Reducing Nonpoint Source Pollution : A Laboratory Experiment

Auctions have the potential and are expected to improve the cost-effectiveness of nonpoint source pollution abatement to which the polluter pays principle is considered difficult to apply. In this study, we consider a model of reverse auction in which emissions trading credits for reducing nonpoint source pollution are traded. The environmental impacts of nonpoint sources can vary depending on their geographic characteristics. Through a laboratory experiment, we examined the effects of market segmentation by environmental impacts on auction performance when such information was disclosed to the auction participants. We found that although the disclosure of information about environmental impacts deteriorated the auction performance, market segmentation improved the performance and completely canceled out those impacts