Auction Design for Allocating Allowances and Licenses: Consignment and Price Containment Mechanisms

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Auction Design for Allocating Allowances and LicensesAuctions are being increasingly used to allocate scarce public resources or to limit externality-producing activities like urban traffic congestion. Regulatory agencies in the US and the EU, for example, use auctions extensively to allocate "allowances" that limit particular types of emissions. Other examples include the sale of auto licenses to limit traffic congestion, the sale spectrum for wireless communications services, or the sale of government assets like energy leases or securities. Some types of auctions may be better than others in terms of transparency, public revenue generation, and selection efficiency (ensuring that low-cost providers or high-value users are more likely to obtain permits). Auction performance, however, may be sensitive to underlying market and information conditions in ways that are difficult to model using standard mathematical and statistical methods. The properties of various auction designs can be evaluated with laboratory simulations using financially motivated subjects. An auction that is easily manipulated in the lab is unlikely to perform well in the field. Such experiments can be used to detect design flaws and improvements at an early stage, before implementation, and to think outside the box by testing novel auction procedures in stressful environments. The proposed experiments are designed to evaluate alternative auction processes for government sales of "permits" in a fairly wide class of settings that cover emissions, securities, broadcast frequencies, and leases. Auctions that are tailored to particular policy issues can result in a greater understanding of how economic institutions moderate strategic behavior to produce desired welfare and revenue-enhancing outcomes. For example, an understanding of the behavior of participants who can both sell (consign) and bid to buy in the same auction would be important for the design of auctions that repurchase licenses (e.g. spectrum or fishing rights) and simultaneously repackage them for sale to more efficient users. The proposed scope of the project also includes the sustained development of web-based market experiments and associated teaching materials for economics and other social sciences. These web-based experiments will continue to be freely available on the Veconlab website.