The Diffusion of Market-Based Instruments

Abstract

This article examines adoption of a market instrument for reducing air pollution across the U.S. states. Because market instruments are viewed as reducing compliance costs, we hypothesize that market instruments should be more likely adopted in states whose electricity prices are higher than the average price in other states, especially their economic peers. Using a hazard model for a panel of 35 states from 1991 to 2003, we find that the adoption and the timing of market instruments are positively associated with the relative price of electricity even after controlling for a slate of variables, including the political context, the severity of air pollution, and neighborhood effects.