A simple auction mechanism for the optimal allocation of the commons

Abstract

Efficient regulation of the commons requires information about the regulated firms that is rarely available to regulators (e.g., cost of pollution abatement). Different mechanisms have been proposed for inducing firms to reveal their private information but for reasons I discuss in the paper, I find these mechanisms of limited use. I propose a much simpler 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 decrease with the number of firms, are such that truth-telling is a dominant strategy regardless of whether firms behave non-cooperatively or collusively.