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A Simple Auction Mechanism for the Optimal Allocation of the Commons

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Author Info
Juan-Pablo Montero

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Abstract

Efficient regulation of the commons requires information about the regulated firms that is rarely available to regulators (e.g., cost of pollution abatement). This paper proposes a simple mechanism that implements the first-best for any number of firms: a uniform price, sealed-bid auction of an endogenous number of (transferable) licenses with a fraction of the auction revenues given back to firms. Paybacks, which rapidly decrease with the number of firms, are such that truth-telling is a dominant strategy regardless of whether firms behave non-cooperatively or collusively. The mechanism also provides firms with incentives to invest in socially optimal R&D. (JEL D44, L51, Q21)

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File URL: http://hdl.handle.net/10.1257/aer.98.1.496
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File URL: http://www.aeaweb.org/articles/article_detail.php?journal=AER&volume=98&issue=1&article=20&issue_date=March2008
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 1 (March)
Pages: 496-518
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Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:496-518

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Groves, Theodore & Ledyard, John O, 1977. "Optimal Allocation of Public Goods: A Solution to the "Free Rider" Problem," Econometrica, Econometric Society, vol. 45(4), pages 783-809, May. [Downloadable!] (restricted)
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  2. Kwerel, Evan, 1977. "To Tell the Truth: Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 595-601, October. [Downloadable!] (restricted)
  3. Paul R. Milgrom, 1985. "Auction Theory," Cowles Foundation Discussion Papers 779, Cowles Foundation, Yale University. [Downloadable!]
  4. Roberts, Marc J. & Spence, Michael, 1976. "Effluent charges and licenses under uncertainty," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 193-208. [Downloadable!] (restricted)
  5. Dasgupta, Partha & Hammond, Peter & Maskin, Eric, 1980. "On Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Blackwell Publishing, vol. 47(5), pages 857-60, October. [Downloadable!] (restricted)
  6. Joskow, Paul L & Schmalensee, Richard & Bailey, Elizabeth M, 1998. "The Market for Sulfur Dioxide Emissions," American Economic Review, American Economic Association, vol. 88(4), pages 669-85, September. [Downloadable!] (restricted)
  7. Wiggins, Steven N & Libecap, Gary D, 1985. "Oil Field Unitization: Contractual Failure in the Presence of Imperfect Information," American Economic Review, American Economic Association, vol. 75(3), pages 368-85, June. [Downloadable!] (restricted)
  8. Peter Cramton & Suzi Kerr, 2002. "Tradeable Carbon Permit Auctions: How and Why to Auction Not Grandfather," Papers of Peter Cramton 02eptc, University of Maryland, Department of Economics - Peter Cramton, revised 06 May 2002. [Downloadable!]
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  9. Hal R. Varian, 1994. "A Solution to the Problem of Externalities when Agents are Well-Informed}," Microeconomics 9401003, EconWPA. [Downloadable!]
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  10. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November. [Downloadable!] (restricted)
  11. Juan-Pablo Montero, 2005. "Pollution Markets with Imperfectly Observed Emissions," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 645-660, Autumn.
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  12. Lawrence M. Ausubel, 2004. "An Efficient Ascending-Bid Auction for Multiple Objects," American Economic Review, American Economic Association, vol. 94(5), pages 1452-1475, December. [Downloadable!]
  13. Tom Tietenberg, 2003. "The Tradable-Permits Approach to Protecting the Commons: Lessons for Climate Change," Oxford Review of Economic Policy, Oxford University Press, vol. 19(3), pages 400-419.
  14. McAfee, R Preston & McMillan, John, 1992. "Bidding Rings," American Economic Review, American Economic Association, vol. 82(3), pages 579-99, June. [Downloadable!] (restricted)
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    • McAfee, R. Preston & McMillan, John., 1990. "Bidding Rings," Working Papers 726, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  15. Ilan Kremer & Kjell G. Nyborg, 2004. "Divisible-Good Auctions: The Role of Allocation Rules," RAND Journal of Economics, The RAND Corporation, vol. 35(1), pages 147-159, Spring.
  16. Spulber, Daniel F., 1988. "Optimal environmental regulation under asymmetric information," Journal of Public Economics, Elsevier, vol. 35(2), pages 163-181, March. [Downloadable!] (restricted)
  17. John Duggan & Joanne Roberts, 2002. "Implementing the Efficient Allocation of Pollution," American Economic Review, American Economic Association, vol. 92(4), pages 1070-1078, September. [Downloadable!]
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  18. Weitzman, Martin L, 1974. "Prices vs. Quantities," Review of Economic Studies, Blackwell Publishing, vol. 41(4), pages 477-91, October. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Brechet, Thierry & Picard Pierre M., 2008. "The Price of Silence: Markets for Noise Licenses and Airports," CREA Discussion Paper Series 08-08, Center for Research in Economic Analysis, University of Luxembourg. [Downloadable!]
  2. Juan Pablo Montero, 2008. "Mecanismos de Subasta para la Protección Ambiental y de Otros Recursos Comunes," Documentos de Trabajo 340, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  3. Enrique Calfucura & Jessica Coria & José Miguel Sánchez, 2008. "Permisos Transables de Emisión en Chile: Lecciones, Desafíos y Oportunidades para Países en Desarrollo," Documentos de Trabajo 347, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  4. Juan Pablo Montero, 2009. "Market Power in Pollution Permit Markets," Documentos de Trabajo 355, Instituto de Economía. Pontificia Universidad Católica de Chile.. [Downloadable!]
  5. Juan Pablo Montero, 2007. "An Auction Mechanism for the Commons: Some Extensions," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 44(130), pages 141-150. [Downloadable!]
  6. Jonathan Pincus & Perry Shapiro, 2008. "Between forced resumption and voluntary sale: a mechanism for the collective sale or transfer of irrigation water," Working Papers 2008-07, University of Adelaide, School of Economics. [Downloadable!]
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