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Tell the truth or not? The Montero mechanism for emissions control at work

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  • Requate, Tilman
  • Camacho-Cuena, Eva
  • Ch'ng, Kean Siang
  • Waichman, Israel

Abstract

We experimentally test the truth-telling mechanism proposed by Montero (2008) for eliciting firms' abatement costs. We compare this mechanism with two well-known alternative allocation mechanisms, grandfathering and pure auctioning. We conducted 27 treatments with a total of 623 participants, controlling for the allocation mechanism, the number of firms, and the true maximal emission levels. We find that, in line with the theoretical predictions, firms over-report their maximal emissions under grandfathering and under-report them under pure auctioning, while under Montero's mechanism firms almost always report their maximal emissions truthfully. However, in terms of efficiency, the difference between Montero's mechanism and pure auctioning disappears when there is more than one firm in the market.

Suggested Citation

  • Requate, Tilman & Camacho-Cuena, Eva & Ch'ng, Kean Siang & Waichman, Israel, 2018. "Tell the truth or not? The Montero mechanism for emissions control at work," Economics Working Papers 2018-02, Christian-Albrechts-University of Kiel, Department of Economics.
  • Handle: RePEc:zbw:cauewp:201802
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    More about this item

    Keywords

    mechanism design; environmental policy; permit trading; auctions; experiment;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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