Breaking Collusion in Auctions through Speculation: An Experiment on CO2 Emission Permit Markets

The European Emission Trading Scheme (EU‐ETS) has chosen to adopt an auctioning procedure to initially allocate CO₂ emission permits. Free allocation of permits will become an exception for the third phase (2013–2020) and most firms will have to buy all their permits on the market or via auctions. The ability of bidders to collude is a key concern about the design of the auction format. To counter collusion, the auction can be open to bidders without compliance obligations (speculators). This paper aims at studying experimentally speculation as a collusion‐breaking device in two different auction mechanisms: the uniform‐price sealed‐bid auction and the ascending clock auction. Our results suggest that a uniform sealed‐bid auction open to speculators should be chosen from a revenue maximization point of view. In this mechanism, compliance agents adopt an aggressive strategy toward speculators. This strategy significantly increases the seller's revenue, compared to the more collusive clock auction. In the latter, on the contrary, bidders accommodate speculators, letting them buy permits in the auction and buying their necessary permits on the secondary market. However, as opening the auction to speculators deteriorates efficiency, the regulator faces a trade‐off between these two objectives.     

CONTRACTING FOR AN INNOVATION UNDER BILATERAL ASYMMETRIC INFORMATION*

We analyze licensing contracts between informed innovators and developers exerting profit‐increasing effort. Those contracts must simultaneously induce innovators to convey information on the value of their ideas, while inducing developers to exert effort and protecting the innovators' intellectual property rights. We show that the best innovators signal themselves by taking more royalties even if it reduces the developers' share of returns and their incentives. Moreover, royalties are more likely to be used when property rights are easy to enforce and pre‐contractual evidence on innovation quality is hard to produce.     

Traditional Management Systems, Poverty and Change in the Arid Zone Fisheries of Northern Nigeria

This paper, based on fieldwork results, explores traditional management systems (TMS) in the arid zone fisheries of north-eastern Nigeria with particular reference to their impact on rural poverty. The first section provides a historical background by tracing the evolution of the TMS since the nineteenth century, with reference to government policy on fisheries management and poverty alleviation. The second gives an overview of TMS, including definitions, distribution, principal objectives, regulatory mechanisms and the impact of TMS on the performance of the fisheries and on the livelihoods of rural people. The third considers the perceptions and attitudes of the fishing communities with regards to the fisheries and TMS. The paper concludes, paradoxically, that while TMS provide a basis for the sustainable livelihoods of many fishing people, they also reflect and enforce the social positions of the rich and powerful members of society who oversee them, at the expense of the poor. In the future, poverty alleviation in fisheries will need to incorporate both sectoral and non-sectoral strategies – dealing with the existing 'paradox of TMS' by encouraging appropriate institutional changes and community development, and recognizing the importance of employment creation in other sectors of the economy as a source of alternative income.     

Trade Restrictiveness and Pollution

This paper proposes a trade restrictiveness indicator that explicitly incorporates environmental externalities. The index employs directional distance functions and uses indicators (i.e., differences rather than ratios) modified to account for and evaluate efficiency changes in the face of simultaneous and multidimensional trade and environmental policy reforms. The index is made up of two components, one for production and one for consumption. Our overall trade restrictiveness indicator is accordingly the difference of the two. The properties of the indicator are developed and discussed together with its estimation.     

Response to ‘Duplications’ by Drelichman and Voth

In this response, we demonstrate that Mauricio Drelichman and Hans‐Joachim Voth, in their 2015 Economic History Review note ‘Duplication without constraints: Álvarez‐Nogal and Chamley's analysis of debt policy under Philip II’, provide a misconceived and inaccurate account of our argument about the finances of Philip II in ‘Debt policy under constraints: Philip II, the Cortes, and Genoese bankers’ (Economic History Review, 2014). Here, we summarize our position in the context of the current literature and provide a few comments on data gathering.     

The Strategic and Effective Dimensions of the Border Tax Adjustment

Between 2001 and 2011, the Kyoto Protocol has experienced defections of two countries that took part in its negotiation and accounted for around 44% of all parties' emissions. The border tax adjustment, a tax levied on imports to reproduce domestic taxation on similar goods, is advocated to prevent such compliance failures as well as to support unilateral pollution regulations by mitigating firms' competitiveness losses and carbon leakages. The paper investigates whether this trade instrument can constitute a decentralized solution to achieve the first‐best in a noncooperative framework. It develops a two‐country two‐firm reciprocal‐market model of trade with global pollution and country heterogeneity. Countries' interactions are studied following a noncooperative game theory approach, for two scenarios defined by the possibility to implement a border tax adjustment to sanction unilateral deviation from the cooperative situation. The paper predicts first that this opportunity modifies the countries' choices of strategies toward more compliance; second that among the strategic and effective dimensions of the border tax adjustment, only the former allows to achieve the first‐best; finally that the border tax adjustment fosters countries' participation in the cooperative international environmental agreement.     

The Effect of Tax-Based Savings Incentives on Government Revenue

There is an unresolved debate on the effect of tax-based savings incentives on government revenue. The conventional wisdom on tax-assisted saving plans (TASPs) holds that they reduce public savings, but may raise national savings by stimulating private savings. Feldstein (1995) has challenged the view that TASPs reduce government revenue. According to Feldstein, ‘some of the increase in personal saving raises the corporate capital stock, and the return on this additional capital raises corporate tax payments’. When the additional corporate income tax revenue is taken into account, ‘the revenue loss associated with IRAs [Individual Retirement Accounts] either is much smaller than has generally been estimated or is actually a revenue gain’. This paper extends Feldstein's analysis to incorporate international considerations, differences in tax structures and alternative values for key parameters. We show that the result presented by Feldstein represents a special case that does not lead to broad generalisations. We also show that, under most conditions, the tenets of conventional wisdom that TASPs reduce government revenue are likely to hold, but that the magnitude of the effect may not be large. Finally, we suggest that the focus of research on the savings effects of TASPs is justifiable in a closed economy, where domestic savings affect domestic investment, but is not useful for policy development in small open economies. JEL classification: H2, H3, H6.     

Weak Moral Motivation Leads to the Decline of Voluntary Contributions

We develop a model that accounts for the decay of the average contribution observed in experiments on voluntary contributions to a public good. The novel idea is that people's moral motivation is “weak.” Their judgment about the right contribution depends on observed contributions by group members and on an intrinsic “moral ideal.” We show that the assumption of weakly morally motivated agents leads to the decline of the average contribution over time. The model is compatible with persistence of overcontributions, variability of contributions (across and within individuals), the “restart effect” and the observation that the decay in contributions is slower in longer games. Furthermore, it offers a rationale for conditional cooperation.