A compensation mechanism for siting noxious facilities: Theory and experimental design

In locating noxious facilities, such as a trash disposal plant or a hazardous waste disposal incinerator, the host community frequently incurs all the costs while other communities in the region receive the benefits. We propose a mechanism for sharing the benefits with the potential loser. Each community submits a sealed bid indicating the minimum amount it would require to host the facility. The site providing the lowest bid obtains the facility and receives its bid as compensation. This compensation is financed by the other communities. If there are N candidate communities, then each of the other communities would pay 1/(N − 1) of their acceptance bid. A series of controlled laboratory experiments show that the outcomes of this low-bid auction come close to predictions from a theoretical model based on maxi-min rules. Equity and efficiency considerations also are discussed in the context of the noxious facility problem.