Design Incentives Under Collective Extended Producer Responsibility: A Network Perspective

53 Pages Posted: 28 Nov 2015

See all articles by Luyi Gui

Luyi Gui

University of California, Irvine - Paul Merage School of Business

Atalay Atasu

Georgia Institute of Technology - Sustainability

Ozlem Ergun

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE)

L. Beril Toktay

Georgia Institute of Technology - Sustainability

Date Written: November 1, 2015

Abstract

Extended Producer Responsibility (EPR) legislation aims to create incentives for producers to design products that are easier to recycle. In this paper, we study whether a collective EPR implementation, which is common in practice due to its cost efficiency advantage, can achieve this goal. In particular, we look for cost allocation mechanisms in a collective system that provide at least as effective design incentives as those induced by an individual system benchmark, while ensuring voluntary participation of producers (i.e. satisfying group incentive compatibility). Based on a biform network game model, we show that a cost allocation mechanism that satisfies the above criteria exists only if the recycling infrastructure satisfies certain properties in terms of (i) how recycling costs change as a function of design choices and (ii) the processing capacity mix relative to the return volume. Otherwise, a cost allocation mechanism that leads to effective design incentives can only guarantee individual rationality but not group incentive compatibility. This indicates a critical tradeoff between producers' design incentives and their voluntary participation in a collective system. That is, participation by enforcement may be required for a policy maker to induce superior designs and maintain a stable collective implementation (and therefore realize its cost efficiency advantage). If this is not feasible, then one needs to accept collective implementations as enablers of cost-efficiency at the expense of inferior design incentives, and find other means (i.e., other forms of regulatory intervention) besides cost allocation to provide design incentives.

Keywords: Legislation, Extended Producer Responsibility, Design for Environment

Suggested Citation

Gui, Luyi and Atasu, Atalay and Ergun, Ozlem and Toktay, L. Beril, Design Incentives Under Collective Extended Producer Responsibility: A Network Perspective (November 1, 2015). Georgia Tech Scheller College of Business Research Paper No. 27. Available at SSRN: https://ssrn.com/abstract=2696143 or http://dx.doi.org/10.2139/ssrn.2696143

Luyi Gui

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

Atalay Atasu (Contact Author)

Georgia Institute of Technology - Sustainability ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Ozlem Ergun

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE) ( email )

765 Ferst Drive
Atlanta, GA 30332-0205
United States

L. Beril Toktay

Georgia Institute of Technology - Sustainability ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

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