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

Spatial Coordination in Agglomeration Bonus Schemes with Transaction Costs and Communication: An Experimental Study
Date: 2015-05
By: Simanti Banerjee (University of Nebraska-Lincoln)
Timothy N. Cason (Purdue University)
Frans P. de Vries (University of Stirling)
Nick Hanley (Department of Geography and Sustainable Development, University of St. Andrews)
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
JEL: C91 D83 D81 Q51 Q



The Impact of Information Provision on Agglomeration Bonus Performance: An Experimental Study on Local Networks

Date: 2013
By: Banerjee, Simanti
de Vries, Frans P.
Hanley, Nick
van Soest, Daan
The Agglomeration Bonus (AB) is a mechanism to induce adjacent landowners to spatially coordinate their land use for the delivery of ecosystem services from farmland. This paper uses laboratory experiments to explore the performance of the AB in achieving the socially optimal land management configuration in a local network environment where the information available to subjects varies. The AB poses a coordination problem between two Nash equilibria: a Pareto dominant and a risk dominant equilibrium. The experiments indicate that if subjects are informed about both their direct and indirect neighbors’ actions, they are more likely to coordinate on the Pareto dominant equilibrium relative to the case where subjects have information about their direct neighbors’ action only. However, the extra information can only delay – and not prevent – the transition to the socially inferior risk dominant Nash equilibrium. In the long run, the AB mechanism may only be partially effective in enhancing delivery of ecosystem services on farming landscapes featuring local networks.
Keywords: Agglomeration bonus, agri-environment schemes, biodiversity conservation, ecosystem services, information spillovers, Payments for Ecosystem Services, spatial coordination,