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Experimental economics in transportation policy

Shipping Saskatchewan grain to market is no game, but James Nolan is using experiments in the form of computer games to better understand how Canada’s freight system works, and how it can be made as economical as possible.

Nolan, a professor in the Department of Agricultural and Resource Economics, is an economist breaking new ground by designing computer experiments that emulate Canada’s grain transportation system. The aim is to test and validate transportation policies to ensure fairer returns for both railways and grain shippers.

“This is pretty exciting stuff,” said Nolan, who joined the College of Agriculture and Bioresources in 1998 after earning a PhD in economics from the University of California, Irvine. “Most people think of transportation research as being engineering based, but my primary interest is using economic analysis to study transportation, figure out how to identify a problem, and then how to fix it.”

One overarching challenge is developing policies that will increase competitiveness in a rail industry that only has two players, he said. Another is “the perception, and reality, that freight rates are too high vis-à-vis rail costs.”

Understanding how the system actually works is where his experimental analysis game comes in. It uses five subjects, one acting as a railway and the other four acting as agricultural shippers who must move product to a predetermined destination. The players negotiate transportation rates and then the railway moves the product with everyone trying to optimize their own profits.

The first runs of the experiment, conducted within the Social Science Research Lab (SSRL) in the College of Arts and Science, produced results Nolan described as “interesting and somewhat surprising. It turns out shippers have a fairly easy decision-making process and did pretty well, but it was a much more complicated process than expected for the railway player.”

While some players came close, no one managed to solve the game in the way Nolan expected, at least not yet. Scientific experiments evolve based on outcomes, he explained, so modifications are underway to make it easier for the rail player to economize within the experimental supply chain.

Nolan’s research is a perfect fit with his lifelong interest in transportation. Growing up in Montreal, the son of a railway employee, “I built models of everything—cars, trains, planes. Railway operations and finance were dinner table conversation with dad often talking about logistics and car allocation. My research is just an extension of the kind of chatter I grew up with.”

Throughout his studies, which began at Concordia University and continued with a master’s degree at York University before he moved to California, Nolan focused mainly on urban transportation issues because there were few opportunities to do advanced research on freight transportation.

It wasn’t until he came to Saskatchewan that he was able to indulge his passion for rail and logistics, although he admits the whole transportation system is “a bit of an odd duck” from a policy perspective.

“Transportation doesn’t get noticed until it breaks; until then, people tend to forget it exists … but freight transportation is so important to Canada. Canada has always been an export-driven country, and we possess a vast transportation system. Part of the work that I do is try to make sure it runs smoothly and improve what I can.”

With the gaming experiment, Nolan has created the opportunity to assess both the intended and unintended consequences of current government grain transportation policies, and to pre-test potential future policy changes before they are enacted. The research is still in its early stages, he said, “but this could end up defining the very nature of evidence-based policy making” in Canadian transportation.

In fact, Transport Canada officials met with Nolan in late July to discuss his research and see the grain transportation experiment in action.

With funding from the Saskatchewan Ministry of Highways and Transportation and the Saskatchewan Centre of Excellence for Transportation and Infrastructure in the U of S College of Engineering, Nolan will refine and run more grain transportation experiments. There are several new experimental designs in development, “and the queue is starting to build up. There are many interesting questions that have come out of this.”

His ultimate goal, of course, is to publish the results and in doing so, he will be contributing not only to improving freight transportation but also to the use of experimental economics for policy development. 

“For many researchers, this is what economics has become. As a scientist, what you do has to be subject to experimental scrutiny. We want to do research that is objective and scientific, and in addition helps develop superior policies moving forward.”

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