A Simple Auction Mechanism for the Optimal Allocation of the Commons

Juan-Pablo Montero

American Economic Review, Vol 98, No. 1, pp. 496-518 (March 2008)

Juan-Pablo Montero, American Economic Review, Vol 98, No. 1, pp. 496-518 (March 2008)

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.

(CEEPR Working Paper 2006-008 is an earlier version of this article)

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