Experimental Examination of the Compensation Mechanism

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This project continues experimental research on institutions that may offer an appropriate framework for negotiating solutions to externality problems such as global warming, pollution control, and common resources. The institutions, known as compensation mechanisms, yield efficient outcomes for most externalities problems of interest to economists. They also have attractive distributional characteristics in that they yield allocations that are competitive equilibria with the externalities priced at marginal cost. This project investigates experimentally the performance of different compensation mechanisms for two-party unilateral externalities, public goods, general externalities structures, commons problems, and congestion problems. The experiments are run both with and without full information. The project also develops and disseminates a computer environment for NeXT workstations that captures the logical structure for all externalities problems. As a consequence the same computer program can be used for all experimental work on externalities - just the user interface and the payoff structure will change.