A Small Volume Reduction that Melts Down the Market: Auctions with Endogenous Rationing

Auctions with endogenous rationing are motivated by the regulatory requirement of so-called proportionality of public support and are used to allocate support for renewable energy. They reduce the auctioned volume below the tender volume when competition is low. We show theoretically that endogenous rationing has the extreme effect of deterring any participation when single-unit bidders have participation costs. Our experiment provides support for a strong negative effect on participation. We derive optimal mechanisms for three objectives and several designs for their implementation. They do not use endogenous rationing and exhibit the usual tradeoffs between objectives. However, reducing participation costs, as opposed to increasing the number of potential bidders, contributes to all three objectives and helps ensure proportionality.

Ehrhart, Karl-Martin, Ann-Katrin Fleck and Marion Ott (2026), A Small Volume Reduction that Melts Down the Market: Auctions with Endogenous Rationing, European Economic Review (EER) 189 , 105436