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A Simple Auction Mechanism for the Optimal Allocation of the Commons

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  • Juan-Pablo Montero

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)

Suggested Citation

  • Juan-Pablo Montero, 2008. "A Simple Auction Mechanism for the Optimal Allocation of the Commons," American Economic Review, American Economic Association, vol. 98(1), pages 496-518, March.
    • Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:496-518
    DOI: 10.1257/aer.98.1.496
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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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