THE EFFICIENCY OF COLLABORATIVE DECISION MAKING PROTOCOLS: CONCLUSIONS, LESSON LEARNED AND POLICY IMPLICATIONS FROM ECONOMIC LABORATORY TESTBEDS

SUMMARY REPORT TO THE POLICY BOARD OF THE INSTITUTE FOR ENVIRONMENT AND NATURAL RESOURCES AT THE
UNIVERSITY OF WYOMING

August, 1991

Thomas Rhoads
Jason F. Shogren
Department of Economics and Finance
University of Wyoming

Examples of devolution in the environmental arena abound. Refinement of the more traditional decision-making processes grew primarily out of dissatisfaction with their costly consequences. Heavy reliance on litigation from both sides in the environmental debate began to escalate legal fees and prompt long delays in enacting changes in the environmental arena. As a result, less adversarial methods of problem solving are attracting considerable attention in the environmental arena. Negotiation, mediation, arbitration and facilitation are just some of the techniques that are now used extensively in resolving environmental disputes and designing natural resource management plans. Furthermore, the use of relatively new decision-making processes, such as regulatory negotiation and collaborative decision-making, that incorporate these techniques is becoming more common.

A testbedding approach produced measures of efficiency and the distribution of wealth for certain rules present in the collaborative process. By generating experience and data in the experimental laboratory, this information serves as a means of examining and refining current negotiation methods in the environmental arena. The results from the three experiments considered in this research suggest some useful lessons to apply when implementing the collaborative decision-making process. Taken together, the lessons also offer direction for future research and provide limits to the use of the collaborative decision-making process. These lessons follow.

Lesson 1. Devoting more resources to the design of a collaborative process does not always produce comparable gains in efficiency.

While it is expected that some rules of the collaborative process will generate significant efficiency gains, the results from this research suggest that incorporating certain rules into the design of a collaborative process may not generate appreciable gains in efficiency. A relatively simple and inexpensive collaborative process may provide an optimal negotiation framework for generating long-lasting solutions to concerns in the environmental arena. As such, careful design requires attention to the benefits and the costs of each element of the collaborative process. A testbedding experimental approach can be used to flesh out those rules that add nothing of value to the operation of the collaborative decision-making process. Future testbedding experiments will help to further refine Coasean bargaining in the environmental arena.

Lesson 2. Introducing a cheap talk rule in negotiation can generate efficiency gains, thus offsetting the adverse impact of transaction costs. This suggests that building trust, a common goal of a collaborative process, can be an important means of enhancing efficiency.

Transaction costs reduce efficiency in a Coasean bargaining setting. It is fully expected that successful implementation of the collaborative decision-making process will require significant funding for meeting and search fees. Policy-makers should limit the use of Coasean-style bargaining to those instances in which stakeholders are in relatively close proximity to each other and can meet rather inexpensively, thus keeping transaction costs low. But when high transaction costs are unavoidable, the results from our research suggest that cheap talk is a negotiation rule that can enhance efficiency in Coasean bargaining and partially offset the dampening effects of the considerable transaction costs present in collaborative decision-making. Cheap talk, which allows for non-binding communication of threat points, often characterizes efforts that establish trust in collaborative efforts. While cheap talk (and building trust) can be considered important elements of successful collaborative decision-making, the level of resources that should be directed to these efforts remains an open question.

Lesson 3. Granting final authority to a collaborative group is critical to maintaining high efficiency in environmental decision-making efforts.

Efficiency is quite sensitive to the level of decision-making authority provided to the collaborative group. Our research suggests that efficiency drops significantly as soon as final decision-making authority is taken away from a collaborative group. Efficiency can be maximized in these negotiations by granting final decision-making authority to a collaborative group. Policy-makers should step up efforts to provide this authority to collaborative groups. For example, allowing local groups to determine liability shares for cleaning up hazardous waste sites (a local issue) that is driven by CERCLA (a national law) will produce more efficient outcomes if the local group is given final decision-making authority. While existing legislation does not currently permit this, EPA pilot programs are moving in this direction and can be expected to produce a higher degree of cost-effectiveness in the Superfund program. This lesson can also be applied to other legislative mandates, such as the Endangered Species Act and the National Environmental Policy Act. Future testbedding experiments should thus be used to aid in developing efficient negotiation frameworks in amended or new environmental legislation.

Lesson 4. Power balance among stakeholders can enhance efficiency provided the collaborative group is granted final decision-making authority. Stakeholders participating in a collaborative process should be selected carefully.

When final decision-making authority is granted to a collaborative group, power balance among stakeholders produces significant efficiency gains. This suggests that efficiency of environmental negotiation can be enhanced by carefully selecting the stakeholders that are to participate in the collaborative process. EPA is already restricting certain potentially responsible parties (PRPs) from being assigned liability shares for Superfund clean up. More generally, policy-makers should now begin to develop prerequisites for stakeholder participation in other environmental negotiations.

Lesson 5. Experience pushes negotiated agreements closer to the Nash bargaining solution.

Our results suggest that learning through experience will generate distributions of wealth that look more like the Nash bargaining solution. The constrained self-interest characteristic in environmental negotiations today can be expected to give way to mutually advantageous splits of the gains from trade as environmental negotiation continues. Stakeholders not holding property rights to the assets in question will be left with negotiated settlements giving them a smaller share of the gains from trade than they had previously seen. The results suggest that as the collaborative decision-making process is used more in the coming years, wealthy landowners will demand more while other stakeholders will receive less. This development may prompt calls for the refinement of the collaborative process or the introduction of other negotiation procedures. Economic experimental research to testbed alternative protocol strategies remains a useful tool for policy makers to learn about the efficacy of current and proposed environmental negotiation methods.