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American Economic Review: Vol. 98 No. 1 (March 2008)

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A Simple Auction Mechanism for the Optimal Allocation of the Commons

Article Citation

Montero, Juan-Pablo. 2008. "A Simple Auction Mechanism for the Optimal Allocation of the Commons." American Economic Review, 98(1): 496-518.

DOI: 10.1257/aer.98.1.496

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)

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Authors

Montero, Juan-Pablo (Pontifical Catholic U Chile, Santiago and Center for Energy and Environmental Policy Research, MIT)

JEL Classifications

D44: Auctions
L51: Economics of Regulation


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