Water quality trading with asymmetric information, uncertainty and transaction costs: A stochastic agent-based simulation

► We test water quality trading's efficiency in bilateral and clearinghouse markets. ► Transaction costs and trading policy parameters affect the efficiency of market. ► The clearinghouse is more efficient than bilateral market in coordinating trades. ► Both markets are unlikely to approximate...

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Bibliographic Details
Published in:Resource and energy economics 2013-01, Vol.35 (1), p.60-90
Main Authors: Nguyen, N.P., Shortle, J.S., Reed, P.M., Nguyen, T.T.
Format: Article
Language:English
Subjects:
Agent-based model
Applied sciences
Asymmetric information
Asymmetry
Bilateral negotiations
Bounded rationality
Clearinghouse
Computer simulation
Cost control
Costs
Differential Evolutionary algorithm
Earth sciences
Earth, ocean, space
Emissions trading
Engineering and environment geology. Geothermics
Environmental markets
Exact sciences and technology
Markets
Pollution
Pollution, environment geology
Searching
Simulation
Stochastic models
Stochasticity
Studies
Transaction costs
Uncertainty
Water quality
Water quality trading
Water treatment and pollution
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Summary:► We test water quality trading's efficiency in bilateral and clearinghouse markets. ► Transaction costs and trading policy parameters affect the efficiency of market. ► The clearinghouse is more efficient than bilateral market in coordinating trades. ► Both markets are unlikely to approximate the least-cost solution. ► Expectations of gains from trade should be tempered. We examine the efficiency of emissions trading in bilateral and clearinghouse markets with heterogeneous, boundedly rational agents making decisions under imperfect and asymmetric information, and transaction costs. Results are derived using a stochastic agent-based simulation model of agents’ decision-making and interactions. Trading rules, market structures, and agent information structures are selected to represent emerging water quality trading programs. The analysis is designed to provide a strong test of the efficiency of trading occurring through the two market structures. The Differential Evolution algorithm is used to search for market trade strategies that perform well under multiple states of the world. Our findings suggest that trading under both bilateral and clearinghouse markets yields cost savings relatively to no trading. The clearinghouse is found to be more efficient than bilateral negotiations in coordinating point–nonpoint trading under uncertainty and transaction costs. However, the market under both structures is unlikely to achieve or even approximate least-cost pollution control allocations. Expectations of gains from water quality trading should, therefore, be tempered.
ISSN:0928-7655
1873-0221
DOI:10.1016/j.reseneeco.2012.09.002