Abstract
California is currently in the midst of an ongoing water crisis. Agriculture in central California and urban centers in the southern parts of the state rely on the Sacramento-San Joaquin Delta to deliver water to them. However, the Delta as a water conveyance system is unsustainable given that the water supply is stochastic and shortages often occur. Additionally, the infrastructure’s inherent vulnerability to potential supply disruptions from natural disasters, such as earthquakes, is equally as alarming. If policy makers hope to mitigate this crisis and the impending collapse of California’s water supply system, they will first need to identify the next conveyance system or deal with the consequences of cutting off the flow of water to those south of the Delta. Then they will need to finance it. At a time when the condition of California’s fiscal house leaves much to be desired, alternative financing mechanisms utilizing private contributions for a new water conveyance system should be considered. This thesis evaluates alternative financing mechanisms for soliciting private contributions towards financing such a system in a laboratory setting. Reliability pricing and endogenous sizing mechanisms are compared to fixed historical allocations of water resources in a private provisioning of a public threshold good game. The overall experiment simulates likely conditions that California will experience if such a project were attempted. The treatment groups and solicitation mechanisms in this study follow those in Kaplan et al. (2012). The treatment groups considered are Fixed Historical (FH), Fixed Reliability (FR), and Endogenous Reliability (ER). FH is based on a fixed sized system that allocates water based on historical allocations. FR takes this notion a step further by adding priority rights with increased benefits for subjects who contribute more money. ER creates an environment where reliability pricing with priority rights coexists with endogenous sizing of the project via subject contributions. This thesis, however, deviates from Kaplan et al. (2012) by considering how rebates may play a role in their results. In order to assess the impact that the proportional rebate policy in Kaplan et al. (2012) has on contributions, sessions without the rebate are conducted and compared by examining variations across the treatment groups. The underlying theory revolves around the notion that the inclusion of rebates are likely to affect how individuals contribute when mechanisms such as pricing and availability are uncertain. In addition to rebate effects, order effects in these data are also considered since subjects take part in two different treatments in which they may not sufficiency understand how to play the game until the second part. Subjects face two different treatments in a single session to control for systematic differences in individual characteristics. When these treatments are sufficiently complex, subject learning may lead to significant order effects. A preliminary descriptive analysis on experiment results revealed inconsistencies of subject contributing behaviors from one part to another. A more robust statistical analysis discovered that order has a statistically significant impact on contributing. This effect became more apparent when focusing on order within the more complicated reliability pricing treatments. Overall, these results indicate that subject learning outweighs gains from controlling for systematic differences among subjects. A statistical analysis of rebate effects revealed that rebates have a profound influence in reducing the deviation between subject WTP and contributions in the treatments with reliability pricing given that subjects tend to contribute more than their WTP when offered a rebate. Conversely, the influence of rebates in the FH treatment was not found to be statistically significant. This result is expected, as subjects in the FH treatment have no real incentive to contribute more than their WTP. Further, when the size of the system is determined endogenously, rebates are estimated to increase the size of the system upwards of two units. However, the inclusion of rebates does not seem to affect the probability of the system successfully being built in the fixed sized treatments.