Group rewards and individual sanctions in environmental policy

• Published in: Resource and energy economics 2013-01, Vol.35 (1), p.38-59
• Main Authors: Dijkstra, Bouwe R., Rübbelke, Dirk T.G.
• Format: Article
• Language: English
• Subjects: Air pollution caused by fuel industries; Applied sciences; Climate change; Energy; Energy economics; Energy policy; Energy. Thermal use of fuels; Environmental policy; Exact sciences and technology; General, economic and professional studies; General. Regulations. Norms. Economy; Incentives; Rewards; Sanctions; Stochastic emissions; Studies; Team incentive scheme; UK Climate Change Agreements
• ISSN: 0928-7655; 1873-0221
• DOI: 10.1016/j.reseneeco.2012.09.001

► We study an incentive scheme where each agent is rewarded if the group target is met. ► Otherwise, only the agents that meet their individual target are rewarded. ► This incentive scheme is applied in the UK Climate Change Agreements. ► With realistic targets, group rewards lead to less abatement than individual rewards. ► Given the strictness of the targets, the agents prefer group rewards. We examine an incentive scheme for a group of agents, where all agents are rewarded if the group meets its target. If the group does not meet its target, only the agents that meet their individual target are rewarded. This incentive scheme is applied in the UK Climate Change Agreements. There is only a difference in outcome between group and individual rewards if performance is stochastic. Group rewards lead to lower abatement than individual rewards if targets are realistic, i.e. if they have a high probability of being reached. Given the strictness of the targets, the agents prefer group rewards. The principal might want to use group rewards because they require less information, out of fairness concerns, or to combine strict targets with weak enforcement.