Incentivising efficient effort when monitoring individuals is costly

Abstract: We propose and explore, both in theory and the laboratory, a mechanism to incentivise optimal individual abatement effort in groups of polluters when individual-level monitoring is costly. The mechanism we propose is a hybrid; rewarding agents for the achievement of a group-level target, while allowing individuals to protect themselves against coordination failure by electing to purchase individual-level monitoring. By exerting optimal individual effort, a monitored agent can guarantee their reward irrespective of group behaviour. We show that the unique Nash equilibrium is characterised by group members exerting optimal levels of individual effort whilst not purchasing monitoring. Thus, the hybrid mechanism disincentivises free riding without realising monitoring costs. Laboratory experiments confirm that the hybrid mechanism offers welfare gains compared to standalone lump-sum group-level incentives and instruments mandating individual-level monitoring. Moreover, the hybrid mechanism maintains levels of efficiency comparable to a group tax, but with more desirable out-of-equilibrium properties.

View Paper