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Type Working Paper
Scope Discipline-based scholarship
Title An Experimental Study of Auctions versus Grandfathering to Assign Pollution Permits
Organization Unit
Authors
  • Jacob Goeree
  • Charles A Holt
  • Karen Palmer
  • Wiliam Shobe
  • Dallas Burtraw
Language
  • English
Institution University of Zurich
Series Name Working paper series / Institute for Empirical Research in Economics
Number No. 429
ISSN 1424-0459
Date 2009
Abstract Text We experimentally study auctions versus grandfathering in the initial assignment of pollution permits that can be traded in a secondary spot market. Low and high emitters compete for permits in the auction, while permits are assigned for free under grandfathering. In theory, trading in the spot market should erase inefficiencies due to initial mis-allocations.nIn the experiment, high emitters exercise market power in the spot market and permit holdings under grandfathering remain skewed towards high emitters. Furthermore, the opportunity costs of “free” permits are fully “passed through.” In the auction, the majority of permits are won by low emitters, reducing the need for spot-market trading. Auctions generate higher consumer surplus and slightly lower product prices in the laboratory markets. Moreover, auctions eliminate the large “windfall profits” that are observed in the treatmentnwith free, grandfathered permit allocations.
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