Wednesday, May 13, 2009

Sharing NIMBY

The NIMBY (Not in my backyard) problem is well known: a globally social good that involves a local private bad is impossible to provide if locals can have veto power. One would think that the Coase Theorem would apply: there is a transfer scheme that compensates the hurt community, paid for by those who benefit. The problem, however, is that the proper compensation is difficult to determine due to the public good and the incentive to lie for all parties. Think about the localization of a new power plant, where locals claim they will all die within a year and the other dispute any significant private benefits.

Jérémy Laurent-Lucchetti and Justin Leroux claim to have solved the problem. The mechanism they propose is the following. Every community proposes a compensation, but before a location is selected. Thus, it is not clear from the onset whether a community will be hosting the public good or not. And in the event it is, it wants to make sure the compensation is good. While this induces truth-telling, it does not necessarily balance the budget: there may not be sufficient compensation for the host to give in. However, the public can be provided if one imposes some information structure in the game. The authors suggest that it works by assuming that every community knows something about the preferences of the other communities. That is perfectly reasonable as long as the number of communities is limited.

Specifically, it should be know which community has the lowest hosting cost, and in equilibrium this is also where the public good is located. The game proceeds in two rounds. First every one announces what the lowest hosting cost overall is. Then, all but the one indicating the lowest cost (the "optimist") reveal their own cost. The one with the lowest cost in that second group is selected, as long as its accepts the compensation determined by the optimist. If not, the optimist is selected. This is a nice example of a game where everyone is kept in check, akin to a divide-and-conquer strategy.


Stephen Monrad said...

While systems like this make sense if cheating and lying is a problem, I believe the real issue is that people simply don't know what the costs of a bad are. In the power plant example, we simply don't know what the health risks are. Even if people are honest, all they can do is guess.

Anonymous said...

I agree with you Stephen that evaluation may be an issue. However, if a community announces a sum for which it will be ready to host the bad, then it can solve the siting issue regardless of the "true" cost. Furthemore, is their a "true" hosting cost outside of what the host wishes to obtain as a compensation ?

VIlfredo said...

I do not think one should see a wide applicability for this scheme. One needs to have relatively few implicated parties, and they need to know their own and the others' costs fairly well. The power plant example is thus not a good one. I wuld rather think of a landfill for trash or a local water treatment plant.