Design Incentives Under Collective Extended Producer Responsibility : A Network Perspective

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