WEAI/AERE 2012 - Individual Paper Abstract
Title: Investigating common-value allowance auctions with price triggers
Author(s): Charles Holt; William SHOBE,Center for Economics and Policy Studies, University of Virginia, P.O. Box 400206, Charlottesville, VA 22904, USA, 434-982-5376, shobe at virginia dot edu [Photo credit: Wikimedia Commons, smog in Shanghai, 1993, German Wikipedia, by DL5MDA]
Abstract:
Recent proposals for the implementation of cap and trade schemes that have features designed to control excessive price volatility. These hybrid schemes often encompass some expansion in the supply of allowances at pre-determined price points either by the auction of additional allowances or by the expanded use of emission offsets. We use laboratory experiments to examine issues of auction design for these hybrid cap and trade regimes. We investigate the performance of commonly proposed auction forms in the case of safety-valve price mechanisms that allow the available supply of allowances to expand oncea price trigger is passed. Experimental methods can help improve the efficiency of market and auction design choices.
Hybrid mechanisms have been widely discussed in the academic literature, have been included in recent emission market designs. The effect of a price cap is to one or more horizontal "steps" to the supply curve. We test the effect of this endogenous supply in sealed bid and sequential (clock) auctions. One plausible outcome is that the multi-round nature of the clock auction will help with information aggregation, which may cause the clock auction to yield better performance in terms of tracking changes in underlying (common value) market conditions. Recent studies report mixed results regarding revenues from emission allowance clock auctions in a private values context, as compared with uniform price and discriminatory sealed bid auctions.
We extend these studies to the more likely common value setting by testing (and rejecting) the hypothesis that clock auctions will outperform sealed-bid auctions when there is a significant common value component, at least in the absence of price triggers. Our current (second) round of experiments retains the common value setting and tests whether either offset or compliance reserve price triggers affect bidder incentives for honest bidding (and other measures of auction performance) and whether the price triggers affect the relative performance of sealed-bid and sequential auctions for emission allowances.