Prices versus Standards and Firm Behavior: Evidence from an Artefactual Field Experiment

Abstract

We conduct an artefactual field experiment in which 164 managers and senior advisors recruited from Swedish industry were presented with a task of maximizing net revenue from abatement investments under three different but equally stringent environmental policy regimes. We find that investment decisions are strongly influenced by type of policy instrument. Economic instruments and performance standards cause different attentional and judgment biases that are inconsistent with standard economic theory. Inconsistencies are larger with economic policy instruments (tax and subsidy) than with performance standards even though subjects’ attention to cost minimization was greater with economic instruments than under performance standards.