Sharing the Surplus Generated from Noncooperative Cost Sharing: The Case of Nonpoint Associations and Water Quality Trading

This paper examines how a regulatory authority might subsidize (i.e., cost share) the partici- pation of associations (or teams) of agents in a surplus-generating economic activity, and how the agents might in turn cooperatively share the surplus. Toward this end, a subgame-perfect equilibrium concept is used to model the “multilateral contracting” relationship between the regulatory authority and the associations when the authority has incomplete information about both the association’s behavior and the natural environment. A common surplus-sharing rule – the Shapley value – is then applied to model the relationship among agents comprising a given association. We show that for convex surplus-sharing games the Shapley Value is included in a non-empty core. The analysis depicts the relationship between a federal regulatory agency and associations of nonpoint pollution sources in a watershed-wide water quality trading market.