DOCSLIB.ORG

Rule-Based Specification of Auction Mechanisms

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Rule-Based Specification of Auction Mechanisms Rule-Based Specification of Auction Mechanisms Kevin M. Lochner and Michael P. Wellman University of Michigan Artificial Intelligence Laboratory 1101 Beal Av Ann Arbor, MI 48109-2110, USA klochner,wellman @umich.edu Abstract high-level, special-purpose language serves several impor- tant functions: Machine-readable specifications of auction mecha- 1. The specification can be executed to implement the nisms facilitate configurable implementation of compu- auction mechanism. tational markets, as well as standardization and formal- ization of the auction design space. We present an im- 2. High-level specifications support rapid deploy- plemented rule-based scripting language for auctions, ment and testing of mechanisms. A series of mecha- which provides constructs for specifying temporal con- nisms may be quickly deployed through modification trol structure, while supporting orthogonal definition of and extension of existing mechanisms. mechanism policy parameters. Through a series of ex- 3. Publication of auction definitions promotes trans- amples, we show how the language can capture much of parency, validation, and standardization of inter- the space of single-dimensional auctions, and can be ex- faces. tended to cover other novel designs. 4. Precise definition of standard auction constructs facili- tates communication among auction designers and an- alysts, and dissemination of design knowledge. 1. Introduction 5. Machine-readable auction definitions can be inter- preted by automated trading agents, who may adapt Technological and financial innovation adding to the their behavior accordingly. complexity of commerce opportunities has placed new de- 6. Formal mechanism descriptions can be manipulated mands on allocating institutions. Standard market proce- computationally, enabling automated search and anal- dures may not adequately serve these complex trade situa- ysis of the design space [3, 11]. tions, which call for increasingly sophisticated mechanisms, or auctions, for determining market outcomes. At the same Our auction specification effort is motivated primarily by time, the Internet medium coupled with advances in com- the implementation imperative, although we attempt to re- putational power has opened the door to previously infeasi- spect the other motivations, in hopes of ultimately accru- ble auction designs. In consequence, recent years have seen ing their benefits. Following the approach previously taken a surge of academic interest in auction design [6, 9, 14], in the Michigan Internet AuctionBot [20], we emphasize in conjunction with the increasing deployment of auctions configurability of auction service, thus attempt to build in (albeit slower than anticipated in the bubble years) in elec- the structures common across the wide auction mechanism tronic marketplaces [17] and deregulated commodity mar- space, yet provide sufficient latitude to accommodate novel kets [8]. These research efforts have led to numerous inno- designs. vations in auction design, addressing such issues as incen- Our approach builds on the parametrization of auction tive compatibility [10], computational efficiency [15], and design space defined by Wurman et al. [21]. In attempting timeliness of market operation [5]. to extend this parametric specification to a wider variety of As the relevant design space expands, there is increas- designs, we experienced a decreasing orthogonality as we ing need for languages to express auction mechanisms [7, introduced parameters. In other words, it became increas- 12, 13, 21, 22]. Specifying an auction mechanism in a ingly necessary to introduce parameters switching on and Permission to make digital or hard copies of all or part of this work for personal or classroom use is granted without fee provided that copies are not made or distributed for profit or commercial advantage and that copies bear this notice and the full citation on the first page. To copy otherwise, to republish, to post on servers or to redistribute to lists, requires prior specific permission and/or a fee. 816 AAMAS'04, July 19-23, 2004, New York, New York, USA. Copyright 2004 ACM 1-58113-864-4/04/0007...$5.00 off whole areas of the design space, thus diluting the bene- ing policy. Along the way, the auction may send messages to fit of previous specification effort. Parameters defining the participants providing information about auction state (of- auction control structure—the temporal pattern of auction ten in highly summarized form), according to its informa- events, seem particularly ill-suited to parametric descrip- tion revelation policy. Since this information often—though tion. In general, the timing of a particular action within an not invariably—includes current price quotes (i.e., indica- auction may depend on arbitrary features of the auction his- tions of what the hypothetical clearing prices would be in tory. For specification of such functional dependence, con- the current state), we refer to both the action and revealed trol structures reminiscent of programming languages may information as a quote. be more effective than simple parameter settings. Following Wurman et al. [21], we maintain that the sub- For example, consider the survival auction [5], which stantial differences among auction mechanisms can be char- proceeds in rounds with the lowest bidder eliminated at acterized by their policies for the three major activities de- the end of each round, until a single bidder remains. In scribed above: processing bids, clearing, and revealing in- this case the set of eligible bidders must be modified over formation. We further decompose the specification of these the duration of the auction. Capturing this auction with a policies into parametrization would seem to require a dedicated param- 1. their functional implementation (i.e., the how), and eter indicating the survival auction, with auxiliary parame- ters defining the length of rounds, bidding rules, etc. As we 2. their timing (the when). see below, rule-based definition of the survival auction leads In our approach, the how is specified primarily through pa- to a more transparent encoding, where the repeated-round rameter settings, and the when through rule condition pat- structure is reflected in the representation, and the process terns. of eliminating bidders is apparent from the rule specifica- We have implemented an auction engine capable of read- tion. ing and implementing these auction definitions, or auc- The remaining sections describe a simple and extensi- tion scripts. We call this auction system AB3D, in refer- ble rule-based language we have designed and implemented ence to the two previous implementation generations of our for the specification of auction mechanisms. The language AuctionBot (“AB”) [20]. The “3D” highlights our three- combines parameter specification with rule-based invoca- dimensional characterization of auction policy space, and tion of auction behaviors, providing sufficient flexibility to also suggests the underlying motivation for our redevelop- capture a wide range of known and conceivable auctions. ment: to support multidimensional market mechanisms. Following explanation of our auction specification frame- work in the next section, we present the details of our lan- 3. The AB3D Scripting Language guage excution environment and address some technical de- tails for coordinating groups of related auctions. Several ex- An AB3D auction script comprises a sequence of state- ample scripts serve to demonstrate the current capabilities ments, of four types: of the language. 1. initialization of auction parameters, 2. Auction Specification Framework 2. rules that trigger auction events and parameter changes, The general class of auctions comprises all mediated 3. declarations of user variables, and mechanisms that determine market-based allocations (i.e., 4. bid rules defining additional bid admissibility require- exchanges of goods and services for money) as a function ments. of agent messages. These messages, or bids, are typically composed of offers specifying deals in which the agent is The language also supports the organization of statements willing to engage. Although the form and content of bids, into distinct phases or rounds, denoting named regimes of along with the auction’s behavior given such bids, can vary auction control. widely among auction mechanisms, there are several com- mon constructs we can define across the entire space [21]. 3.1. Parameters Upon receiving a new or revised bid, the auction deter- mines whether the bid is admissible given its current state. Static auction policies are characterized by prede- If so, the bid is admitted to the order book, a repository fined parameters, conditioning the criteria for admitting representing the current collection of active offers. At some bids, matching offers, and summarizing state informa- point (depending on the auction rules, of course), the mar- tion in quotes. Extension of the auction system to im- ket clears, producing a set of exchanges matching compati- plement a novel mechanism generally requires introduc- ble offers in the order book according to the auction’s clear- ing new parameters, or new values for existing parameters, Permission to make digital or hard copies of all or part of this work for personal or classroom use is granted without fee provided that copies are not made or distributed for profit or commercial advantage and that copies bear this notice and the full citation on the first page. To copy otherwise, to republish, to post on servers or to redistribute to lists, requires
Load more

Recommended publications
  • Comparing Auction Designs Where Suppliers Have Uncertain Costs and Uncertain Pivotal Status
    RAND Journal of Economics Vol. 00, No. 0, Winter 2018 pp. 1–33 Comparing auction designs where suppliers have uncertain costs and uncertain pivotal status ∗ Par¨ Holmberg and ∗∗ Frank A. Wolak We analyze how market design influences bidding in multiunit procurement auctions where suppliers have asymmetric information about production costs. Our analysis is particularly relevant to wholesale electricity markets, because it accounts for the risk that a supplier is pivotal; market demand is larger than the total production capacity of its competitors. With constant marginal costs, expected welfare improves if the auctioneer restricts offers to be flat. We identify circumstances where the competitiveness of market outcomes improves with increased market transparency. We also find that, for buyers, uniform pricing is preferable to discriminatory pricing when producers’ private signals are affiliated. 1. Introduction Multiunit auctions are used to trade commodities, securities, emission permits, and other divisible goods. This article focuses on electricity markets, where producers submit offers before the level of demand and amount of available production capacity are fully known. Due to demand shocks, unexpected outages, transmission-constraints, and intermittent output from renewable energy sources, it often arises that an electricity producer is pivotal, that is, that realized demand is larger than the realized total production capacity of its competitors. A producer that is certain to be pivotal possess a substantial ability to exercise market power because it can withhold output ∗ Research Institute of Industrial Economics (IFN), Associate Researcher of the Energy Policy Research Group (EPRG), University of Cambridge; [email protected]. ∗∗ Program on Energy and Sustainable Development (PESD) and Stanford University; [email protected].
    [Show full text]
  • Introduction to Auctions
    ARE 202 Villas-Boas Introduction to auctions What is an Auction? 1. A public sale in which property or merchandise are sold to the highest bidder. 2. A market institution with explicit rules determining resource allocation and prices on the basis of bids from participants. 3. Games: The bidding in bridge, for example. Examples of Auctions FCC Spectrum McMillan, 1994, Selling Spectrum Rights, JEP. http://www.paulklemperer.org Procurement Auctions Treasury Bills Internet Wine Options Quota Rights, Auctioning countermeasures in WTO Working paper, Bagwell K., Staiger R., et al: http://www.ssc.wisc.edu/~rstaiger/auctionation071803.pdf 1 ARE 202 Villas-Boas Lots of good theory and empirical work. • Game is simple with well defined rules • Actions are observed directly • Payoffs can sometimes be inferred Also, a lot of data • Government sales: o Timber rights, mineral rights, oil and gas, treasury bills, spectrum auctions, emission permits, electricity • Government sales: o Defense, construction, school milk • Private sector: o Auctions houses, agriculture, real estate, used cars, machinery • Online auctions: Many possible mechanisms • Open versus sealed • First price versus second price • Secret versus fixed reserve price 2 ARE 202 Villas-Boas Several Formats: 4 auction types: • First-price sealed-bid auction: you don’t see your opponents’ bids. Highest bid wins. Winner pays her bid, b. The winner’s profit is: v−b. Losers get nothing. • Second-price sealed-bid auction: you don’t see your opponents’ bids. Highest bid wins. Winner pays the second highest bid in the auction. Therefore the winner’s profit is: v minus the second highest bid. Losers get nothing.
    [Show full text]
  • CO2 Emission Allowance Allocation Mechanisms, Allocative Efficiency and the Environment
    CO2 emission allowance allocation mechanisms, allocative efficiency and the environment Stefan Weishaar [email protected] Metro Maastricht University The Netherlands Proposal for a paper to be presented at: First annual meeting of the Asian Law and Economics Association Seoul National University, Korea 24-25 June 2005 University of Maastricht, Faculty of Law PO Box 616, 6200 MD Maastricht The Netherlands Tel: +31-43-3883060 Fax: +31-43-3259091 E-mail: [email protected] Abstract: The paper places allocation mechanisms into a framework of emission trading systems and analyses these mechanisms within a closed static economy and an open dynamic economy with regard to price determination, allocative efficiency and environmental considerations. Firstly the paper examines how market-based allocation mechanisms (auctions) perform in light of the above issues. Secondly the paper distinguishes between the two types of administrative allocation mechanisms: (1) financial administrative allocation mechanisms, combining payment schemes with bureaucratic expertise, and (2) free administrative allocation mechanisms, based inter alia on industrial policy considerations and on passed emission records (grandfathering). In particular, the value added of "relative performance standards" as an allocation mechanism is examined. The overall finding is that in a closed static economy and in the presence of an efficient trading market, different allocation methods produce equally efficient outcomes in allocative and environmental respects. With regard to an open dynamic economy impacts of initial allocation mechanisms resemble those of a static closed economy. In an open economy the upper limit to the internalisation of negative externalities is given by operator’s costs of environmentally harmful relocation and hence the cost burden placed upon operators is crucial.
    [Show full text]
  • Introduction to Auction
    E Business Professor Mamata Jenamani Department of Industrial and Systems Engineering Indian Institute of Technology Kharagpur Lecture-57 Introduction to Auction Welcome back in continuation with our last lecture on dynamic pricing where we learned that dynamic pricing is very natural and it has it is convenient to implement fixed pricing that is why people were going for fixed pricing but because of Internet, now again dynamic pricing has become a reality. So in this context we saw there are many dynamic pricing models out of which we have chosen to discuss about auctions. In today’s class we are going to learn about different kinds of auctions, how to classify auctions and look at few applications if possible. (Refer Slide Time: 1:06) Now what are auctions? Auctions are again very oldest form of market. In fact if you look at the history, probably you can have the evidence of auction being happening even before price even I mean the, it has the written history of at least 500 BC. And the auctions like that of your reverse auction or auctions at EBay and similar such sites are the recent phenomena which is which means this auction has always been there and will be there. This is because as we know this provides a first-degree differentiation where actually the price can be decided based on the demand and supply conditions. Now, example of this auction is not limited to online buying, in fact starting from your spectrum auction for which there has been certain I mean even in India people were talking about this auctions and all for selling spectrum and the selling spectrum to auction is very old.
    [Show full text]
  • Efficient Multiunit Auctions for Normal Goods
    Theoretical Economics 15 (2020), 361–413 1555-7561/20200361 Efficient multiunit auctions for normal goods Brian Baisa Department of Economics, Amherst College I study multiunit auction design when bidders have private values, multiunit de- mands, and non-quasilinear preferences. Without quasilinearity, the Vickrey auc- tion loses its desired incentive and efficiency properties. I give conditions under which we can design a mechanism that retains the Vickrey auction’s desirable in- centive and efficiency properties: (1) individual rationality, (2) dominant strategy incentive compatibility, and (3) Pareto efficiency. I show that there is a mechanism that retains the desired properties of the Vickrey auction if there are two bidders who have single-dimensional types. I also present an impossibility theorem that shows that there is no mechanism that satisfies Vickrey’s desired properties and weak budget balance when bidders have multidimensional types. Keywords. Multiunit auctions, multidimensional mechanism design, wealth ef- fects. JEL classification. D44, D47, D61, D82. 1. Introduction 1.1 Motivation Understanding how to design auctions with desirable incentive and efficiency proper- ties is a central question in mechanism design. The Vickrey–Clarke–Groves (hereafter, VCG) mechanism is celebrated as a major achievement in the field because it performs well in both respects—agents have a dominant strategy to truthfully report their private information and the mechanism implements an efficient allocation of resources. How- ever, the VCG mechanism loses its desired incentive and efficiency properties without the quasilinearity restriction. Moreover, there are many well-studied cases where the quasilinearity restriction is violated: bidders may be risk averse, have wealth effects, face financing constraints, or be budget constrained.
    [Show full text]
  • Online Auction Markets
    Online Auction Markets by Song Yao Department of Business Administration Duke University Date: Approved: Carl Mela, Chair Han Hong Wagner Kamakura Andr´esMusalem Dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Department of Business Administration in the Graduate School of Duke University 2009 Abstract (Business Administration) Online Auction Markets by Song Yao Department of Business Administration Duke University Date: Approved: Carl Mela, Chair Han Hong Wagner Kamakura Andr´esMusalem An abstract of a dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Department of Business Administration in the Graduate School of Duke University 2009 Copyright c 2009 by Song Yao All rights reserved except the rights granted by the Creative Commons Attribution-Noncommercial Licence Abstract Central to the explosive growth of the Internet has been the desire of dispersed buy- ers and sellers to interact readily and in a manner hitherto impossible. Underpinning these interactions, auction pricing mechanisms have enabled Internet transactions in novel ways. Despite this massive growth and new medium, empirical work in mar- keting and economics on auction use in Internet contexts remains relatively nascent. Accordingly, this dissertation investigates the role of online auctions; it is composed of three essays. The first essay, “Online Auction Demand,” investigates seller and buyer interac- tions via online auction websites, such as eBay. Such auction sites are among the earliest prominent transaction sites on the Internet (eBay started in 1995, the same year Internet Explorer was released) and helped pave the way for e-commerce.
    [Show full text]
  • Combinatorial Auction Glossary
    In Peter Cramton, Yoav Shoham, and Richard Steinberg (eds.), Combinatorial Auctions, MIT Press, 2006. Combinatorial Auction Glossary additive set function A set function f is additive if and only if f ðS W TÞ¼ f ðSÞþ f ðTÞ for all dis- joint S and T. activity A measure of the quantity of bidding in a round by a bidder in a simultaneous ascending auction. Activity includes both standing high bids and new bids in the round. In spectrum auc- tions, activity is measured in units of bandwidth times the number of people covered by the license (e.g., MHz-pop). In electricity auctions, the quantity is in energy units (e.g., MWh). activity rule A restriction on allowable bids intended to maintain the pace and encourage price discovery in simultaneous ascending auctions. This is done by preventing the ‘‘snake in the grass’’ strategy, in which a bidder maintains a low level of activity early in the auction and then greatly expands his demand late in the auction. The activity rule forces a bidder to maintain a minimum level of activity to preserve current eligibility. Typically, the activity requirement increases in stages. For example, the activity requirement might be 60 percent in stage 1, 80 percent in stage 2, and 100 percent in stage 3 (the final stage). With a 60 percent activity requirement, each bidder must be active on a quantity of items, equal to at least 60 percent of the bidder’s current eligibil- ity. If activity falls below the 60 percent level, then the bidder’s current eligibility is reduced to its current activity divided by 60 percent.
    [Show full text]
  • Bidder Behavior in Multiunit Auctions: Evidence from Swedish Treasury Auctions Author(S): Kjell G
    Bidder Behavior in Multiunit Auctions: Evidence from Swedish Treasury Auctions Author(s): Kjell G. Nyborg, Kristian Rydqvist, Suresh M. Sundaresan Source: The Journal of Political Economy, Vol. 110, No. 2 (Apr., 2002), pp. 394-424 Published by: The University of Chicago Press Stable URL: http://www.jstor.org/stable/3078454 Accessed: 03/08/2010 10:55 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=ucpress. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. The University of Chicago Press is collaborating with JSTOR to digitize, preserve and extend access to The Journal of Political Economy. http://www.jstor.org Bidder Behavior in MultiunitAuctions: Evidence from Swedish TreasuryAuctions KjellG.
    [Show full text]
  • Strategic Behavior and Underpricing in Uniform Price Auctions Evidence from Finnish Treasury Auctions
    Strategic Behavior and Underpricing in Uniform Price Auctions Evidence from Finnish Treasury Auctions Matti Keloharju Kjell G. Nyborg Kristian Rydqvist1 May 2004 1We are indebted to Markku Malkam¨aki for institutional information and making the data available to us and to Tron Foss for help on technical issues. We are grateful to Matti Ilmanen of Nordea, Raija Hyv¨arinen, Antero J¨arvilahti, Jukka J¨arvinen, Ari-Pekka L¨atti, and Juhani Rantala of the State Treasury of Finland, and to Jouni Parviainen and Samu Peura of Sampo Bank for providing us with institutional information. We also wish to thank Geir Bjønnes, Martin Dierker, David Goldreich, Alex Goriaev, Burton Hollifield, Ilan Kremer, Espen Moen, Suresh Paul, Avi Wohl, Jaime Zender and, especially, an anonymous referee, as well as semi- nar participants at the Bank of England, Binghamton University, Copenhagen Business School, Deutsche Bundesbank, European Central Bank, European Finance Association (Berlin 2002), Fondazione Eni Enrico Mattei, German Finance Association, G¨oteborg University, Helsinki and Swedish School of Economics joint seminar, Humboldt University in Berlin, Lausanne, Lon- don Business School, London School of Economics, Nordea, Norwegian School of Management (BI), Norwegian School of Economics (NHH), Stanford, State Treasury of Finland, University of Bergen, University of Frankfurt, Western Finance Association (Utah 2002), and the UK Debt Management Office for comments and suggestions. Finally, we want to thank Helsinki School of Economics Support Foundation and Foundation for Savings Banks for financial support. Kelo- harju: Helsinki School of Economics and CEPR, email: keloharj@hkkk.fi; Nyborg: UCLA and CEPR. Mailing address: UCLA Anderson School of Management, Box 951481, Los Angeles, CA 90095-1481.
    [Show full text]
  • Deferred-Acceptance Auctions for Multiple Levels of Service
    1 Deferred-Acceptance Auctions for Multiple Levels of Service VASILIS GKATZELIS, Drexel University EVANGELOS MARKAKIS, Athens University of Economics & Business TIM ROUGHGARDEN, Stanford University Deferred-acceptance (DA) auctions are mechanisms that are based on backward-greedy algorithms and possess a number of remarkable incentive properties, including implementation as an obviously-strategyproof ascending auction. All existing work on DA auctions considers only binary single-parameter problems, where each bidder either “wins” or “loses.” This paper generalizes the DA auction framework to non-binary settings, and applies this generalized framework to obtain approximately welfare-maximizing DA auctions for a number of basic mechanism design problems: multi-unit auctions, problems with polymatroid constraints or multiple knapsack constraints, and the problem of scheduling jobs to minimize their total weighted completion time. Our results require the design of novel backward-greedy algorithms with good approximation guarantees. CCS Concepts: • Theory of computation → Approximation algorithms analysis; Algorithmic game theory and mechanism design; Additional Key Words and Phrases: deferred-acceptance auctions; mechanism design; social welfare; approxi- mation algorithms; scheduling 1 INTRODUCTION The work of Milgrom and Segal [33] recently proposed the framework of Deferred-Acceptance (DA) Auctions, a family of single-parameter mechanisms with a number of remarkable incentive properties. In fact, the reverse auction part of the very recently concluded FCC Incentive Auction for reallocating spectrum was a DA auction [14]. DA auctions can be thought of as running an adaptive backward greedy algorithm for deciding the set of accepted bidders. The mechanism maintains a score for each active bidder (which can change from round to round), and rejects in each round the bidder with the lowest score, stopping when the still-active bidders constitute a feasible solution.
    [Show full text]
  • Price and Quantity Collars for Stabilizing Emission Allowance Prices Laboratory Experiments on the EU ETS Market Stability Rese
    Journal of Environmental Economics and Management 76 (2016) 32–50 Contents lists available at ScienceDirect Journal of Environmental Economics and Management journal homepage: www.elsevier.com/locate/jeem Price and quantity collars for stabilizing emission allowance prices: Laboratory experiments on the EU ETS market stability reserve$ Charles A. Holt a, William M. Shobe b,n a Department of Economics, University of Virginia, P.O. Box 400182, Charlottesville, VA 22904, USA b Center for Economic & Policy Studies, University of Virginia, Box 400206, Charlottesville, VA 22904, USA article info abstract Article history: We report on laboratory experiments, with financially motivated participants, comparing Received 26 May 2015 alternative proposals for managing the time path of emission allowance prices in the face of Available online 10 December 2015 random firm-specific and market-level structural shocks. Market outcome measures such as JEL classification: social surplus and price variability are improved by the use of a price collar (auction reserve C92 price and soft price cap). Comparable performance enhancements are not observed with Q5 the implementation of a quantity collar that adjusts auction quantities in response to pri- Q54 vately held inventories of unused allowances. In some specifications, the quantity collar D47 performed worse than no stabilization policy at all. The experiment implemented a specific H2 set of structural elements, and extrapolation to other settings should be done with caution. Nevertheless, an examination of the observed behavioral patterns and deviations from Keywords: optimal behavior suggests that a price collar has an important (although perhaps not Emission markets Price collars exclusive) role to play in constructing an effective market stability policy.
    [Show full text]
  • CO2 Emission Allowance Allocation Mechanisms, Allocative Efficiency
    Eur J Law Econ (2007) 24:29–70 DOI 10.1007/s10657-007-9020-z CO2 emission allowance allocation mechanisms, allocative efficiency and the environment: a static and dynamic perspective Stefan Weishaar Published online: 1 August 2007 Ó Springer Science+Business Media, LLC 2007 Abstract The object of this paper is to place allocation mechanisms into a framework of Emission Trading Systems and thereby to establish a typology. It analyses how various assignment mechanisms deal with issues such as price determination, allocative efficiency and environmental considerations in a static and dynamic economy model. It analyses how allocation mechanisms are to be ranked and whether they serve the attainment of the general equilibrium. First the paper examines how market-based allocation mechanisms (auctions) perform in light of the above issues. Second the paper distinguishes between the two types of administrative allocation mechanisms: (1) financial administrative allo- cation mechanisms, combining payment schemes with bureaucratic expertise, and (2) free administrative allocation mechanisms, based inter alia on industrial policy considerations and on passed emission records (grandfathering). In par- ticular, the value added of relative performance standards, which are for example included in the ‘‘Performance Standard Rate’’ (PSR) Emission Trading System, are examined as a means to provide allowances. The overall finding is that in a closed static economy and in the presence of an efficient trading market, dif- ferent allocation methods produce equally efficient outcomes in allocative and environmental respects. With regard to an open dynamic economy, the impact of initial allocation mechanisms resembles those of a static closed economy. In such an economy the upper limit to the internalisation of negative externalities is given by operator’s costs of environmentally harmful relocation and hence the cost burden placed upon operators is crucial.
    [Show full text]