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Sellers' hedging incentives at EPA's emission trading auction

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  • Dijkstra, B.R.
  • Haan, M.

    (Groningen University)

Abstract

Cason (1993)argued thattheauction theEPAused in order to start the market for sulfur allowances, is not efficient. The set-up of the auction gives both buyers and sellers an incentive to understate their valuation of an allowance. In this paper, we show that the sellers’ incentives are even more perverse than Cason suggested. In particular, we show that sellers have an incentive to set their ask price equal to zero, while simultaneously hedging their bets by submitting a positive bid. It is not possible to derive the Nash equilibrium for this set-up. If such an equilibrium exists, sellers either set only a positive ask price, or an ask price equal to zero, and a positive bid as well.

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File URL: http://irs.ub.rug.nl/ppn/183931262
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Bibliographic Info

Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 99C08.

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Date of creation: 1999
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Handle: RePEc:dgr:rugsom:99c08

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  1. Cason Timothy N., 1993. "Seller Incentive Properties of EPA's Emission Trading Auction," Journal of Environmental Economics and Management, Elsevier, vol. 25(2), pages 177-195, September.
  2. Cason, Timothy N. & Plott, Charles R., 1996. "EPA's New Emissions Trading Mechanism: A Laboratory Evaluation," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 133-160, March.
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Cited by:
  1. Kampas, Athanasios & White, Ben, 2003. "Selecting permit allocation rules for agricultural pollution control: a bargaining solution," Ecological Economics, Elsevier, vol. 47(2-3), pages 135-147, December.
  2. Stephen P. Holland & Michael R. Moore, 2012. "Market Design in Cap and Trade Programs: Permit Validity and Compliance Timing," NBER Working Papers 18098, National Bureau of Economic Research, Inc.
  3. Olivier Rousse & Benoît Sévi, 2005. "Behavioral Heterogeneity in the US Sulfur Dioxide Emissions Allowance Trading Program," ERSA conference papers ersa05p550, European Regional Science Association.

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