Tradable Permit System in an Intertemporal Economy: A General Equilibrium Approach

The marketable permits systems have been widely suggested as a solution for environmental problems. A critical feature in the market is that an agent can be both sellers and buyers of permits, so-called "trader settings." Although properties of the marketable permits in non-trader settings are well-documented, little is known about two fundamental questions of how each of auction mechanisms functions or how much it achieves the efficiency in a trader setting. To answer the questions, we have designed and implemented two different auction mechanisms of trader settings for marketable permits in controlled laboratory experiments: (i) Double auction (DA), and (ii) Uniform price auction (UPA). To the best of our knowledge, this research is the first which designs and implements UPA for marketable permits in a trader setting, and makes a direct comparison with the performance of DA in the same ground. We obtain the following novel results: (1) UPA is more efficient than DA in a trader setting, which is in sharp contrast with the established result in non-trader settings, (2) UPA generates more stable price dynamics and (3) UPA induces subjects to reveal more truthfully about abatement costs for emissions. With these results, we conclude that UPA is more likely to work better than DA in a trader setting.