A Simple Auction Mechanism for the Optimal Allocation of the Commons
Montero, Juan-Pablo. 2008. "A Simple Auction Mechanism for the Optimal Allocation of the Commons."
American Economic Review,
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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Montero, Juan-Pablo (Pontifical Catholic U Chile, Santiago and Center for Energy and Environmental Policy Research, MIT)
L51: Economics of Regulation