Transaction costs and sequential bargaining in transferable discharge permit markets

Market-type mechanisms have been introduced and are being explored for vari ous environmental programs. Several existing programs, however, have not at tained the cost savings that were initially projected. Modeling that acknow ledges the role of transactions costs and the discrete, bilateral, and sequ ential manner in which trades are executed should provide a more realistic basis for calculating potential cost savings. This paper presents empirical evidence on potential cost savings by examini ng a market for the abatement of sediment from farmland. Empirical results based on a market simulation model find no statistically significant change in mean abatement costs under several transaction cost levels when contrac ts are randomly executed. An alternative method of contract execution, gain -ranked, yields similar results. At the highest transaction cost level stud ied, trading reduces the total cost of compliance relative to a uniform sta ndard that reflects current regulations. (C) 2001 Academic Press.