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On fundamental performance of a marketable permits system in a trader setting: Double auction vs. uniform price auction

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Abstract

The marketable permits systems have been widely suggested as a potential solution for environmental problems. A critical feature in the market is that an agent can be both sellers and buyers of permits, so-called "trader settings." Although properties 10 of the marketable permits in non-trader settings are well-documented, little is known in a trader setting, particularly about how different auction mechanisms perform and how much each of them achieves effiency. To answer the questions, we have designed and implemented two different auction mechanisms of trader settings for marketable permits in controlled laboratory experiments: (i) Double auction (DA), and (ii) Uniform price auction (UPA). To the best of our knowledge, this research is the first which designs and implements UPA for marketable permits in a trader setting, and makes a direct comparison with the performance of DA on the same ground. We obtain the following novel results: (1) UPA is more effcient than DA in a trader setting, which is in sharp contrast with the established result in non-trader settings, (2) UPA generates more stable price dynamics and (3) UPA induces subjects to reveal more truthfully about abatement costs for emissions through their trading behaviors. With these results, we conclude that UPA is more likely to work better than DA in a trader setting.

Suggested Citation

  • Koji Kotani & Kenta Tanaka & Shunsuke Managi, 2012. "On fundamental performance of a marketable permits system in a trader setting: Double auction vs. uniform price auction," Working Papers EMS_2012_08, Research Institute, International University of Japan.
  • Handle: RePEc:iuj:wpaper:ems_2012_08
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    Cited by:

    1. Tanaka, Kenta & Matsukawa, Isamu & Managi, Shunsuke, 2020. "An experimental investigation of bilateral oligopoly in emissions trading markets," China Economic Review, Elsevier, vol. 59(C).
    2. Higashida, Keisaku & Tanaka, Kenta & Managi, Shunsuke, 2019. "The efficiency of conservation banking schemes with inter-regionally tradable credits and the role of mediators," Economic Analysis and Policy, Elsevier, vol. 62(C), pages 175-186.

    More about this item

    Keywords

    Marketable permits; Economic experiments; Double auction; Uniform price auction; Trader settings;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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