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A Simple Auction Mechanism for the Optimal Allocation of the Commons

  • Juan-Pablo Montero

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://www.aeaweb.org/articles.php?doi=10.1257/aer.98.1.496
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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
Note: DOI: 10.1257/aer.98.1.496
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