Do taxes or auction mechanisms
affect efficiency of natural
resource utilization?
Fridrik Mar Baldursson and
Jon Thor Sturluson
University of Iceland
Why appropriation of scarcity rents
may matter ...
Allocative efficiency: Positive transaction costs  grandfathering may
lead to an inefficient situation where potentially efficient trades
are not made. Auctions make it more likely that the most efficient
firms end up with the quotas (Stavins, 1995).
Dynamic efficiency: It is argued that auctions provide stronger
incentives for firms to develop substitutes and seek new
solutions for improved resource utilisation (Hahn and
McGartland, 1989).
Uncertainty: Uncertainty about future quota prices may affect
investment incentives and lead to inefficient market outcomes
both with full grandfathering and full auctioning. The regulator
can auction quotas partially to offset this effect (Baldursson and
von der Fehr, 2004).
Public Finance: Revenues raised by auctions can be used to finance
reductions in distortionary taxes (the “double dividend” argument,
Goulder et al, 1996).
Spoiled rotten on Smog and Cod
Two prime examples:
Air pollution permits in the US
ITQ’s in Iceland
Proposition: Collecting a resource fee through auctioning quotas and/or
imposing a tax will help increase efficiency and put pressure on
inefficient firms to exit the industry; see e.g. Gylfason and
Matthiasson on the Icelandic ITQ system.
Caveat: Requires large transactions costs, non-profit motives or
bounded rationality. In a neoclassical model a tax/auction does
not matter for allocative efficiency. Real costs and opportunity
costs are valued alike.
Question: Does a tax/auction matter in the lab (here, without explicit
transaction costs)
Setup
15 periods
• Production conditional on
permit ownership
• Market with permits (Double
auction with assets, Smith,
Suchanek and Williams
(1988)
Fixed supply of permits: 15 in
total
6 different players
• 3 cost structures
• 2 initial endowments
Non-contextual setup
Computer run, using Z-tree
Cost and endowment
Unit of production
Role
Allocation
1.
2.
3.
4.
5.
Init.
Eff.
1
35
35
35
45
55
0
4-5
2
35
35
35
45
55
5
4-5
3
35
45
55
65
65
0
2-3
4
35
45
55
65
65
5
2-3
5
55
65
65
75
75
0
0-1
6
55
65
65
75
75
5
0-1
Output price = 75
Cost parameters are private
information, and fixed throughout
the session
No exogenous uncertainty
Treatments
• A: Benchmark
– The scarcity rent goes to the firm
• B: Tax scenario
– ¾ of supra marginal rents appropriated by a fixed tax per permit
(e$ 15)
• C: Auction scenario
– 20% of permits are revoked each period and reallocated by a
Vickrey auction
The value of rents appropriated in B and C are almost equal, given
prices based on fundamentals
Neo-classical predictions
• Permit holdings should converge to the efficient allocation in all
treatments
• Price equal to discounted future rents (net of tax)
Examples
Session 3A
500
ask
bid
trade
Fundam.
450
400
350
e$
300
250
200
150
100
50
0
1
2
3
4
5
6
7
8
9
Periods
10
11
12
13
14
15
16
Session 2B
300
ask
bid
trade
Fundam.
250
e$
200
150
100
50
0
1
2
3
4
5
6
7
8
9
Periods
10
11
12
13
14
15
16
Session 3B
120
ask
bid
trade
Fundam.
100
e$
80
60
40
20
0
1
2
3
4
5
6
7
8
9
Periods
10
11
12
13
14
15
16
Session 1C
ask
bid
trade
Fundam.
Auction
300
250
e$
200
150
100
50
0
1
2
3
4
5
6
7
8
9
Periods
10
11
12
13
14
15
16
Permit holdings, sessions 1-9
Treatment A
Treatment B
Treatment C
periods
periods
periods
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
2 3 3 4 5 4 5 3 5 4 3 4 4 2 3
2 2 2 4 4 5 4 5 5 3 5 5 4 3 3
1 0 0 1 2 3 2 2 1 2 2 1 2 2 2
3 1 3 2 2 2 2 2 2 2 4 3 3 2 2
3 4 3 3 2 2 2 2 1 2 1 3 1 2 2
3 2 3 1 0 0 2 2 3 1 0 2 2 2 3
2 3 2 3 2 2 1 3 2 3 2 1 0 0 2
3 2 4 5 3 4 2 2 5 3 2 1 2 2 2
1 3 3 4 5 2 3 4 5 4 5 4 4 3 2
5 3 4 4 4 4 4 4 4 4 4 4 4 5 5
1 3 2 2 4 2 3 4 1 5 3 4 2 2 2
3 3 2 2 1 2 2 1 1 3 3 3 2 2 2
1 3 1 1 1 1 1 3 2 2 2 2 3 5 3
2 1 1 0 1 1 3 1 2 1 3 1 5 5 5
3 3 3 4 4 4 3 3 2 1 1 2 3 3 5
2 2 2 1 1 2 2 0 0 0 0 1 1 1 0
4 3 3 1 1 1 1 1 1 1 1 1 1 1 1
4 4 4 3 3 4 3 3 3 4 4 3 2 3 1
0 2 1 1 0 1 0 1 1 0 0 2 3 4 4
4 4 3 4 4 4 3 4 4 3 4 4 3 1 3
2 2 2 4 4 4 4 2 3 2 3 2 3 2 5
4 3 3 4 3 3 3 3 3 3 4 3 2 2 2
4 3 3 4 3 3 3 4 3 3 3 3 5 5 4
4 3 3 3 5 5 5 4 4 4 4 5 4 4 4
1 1 2 2 2 2 3 3 3 3 3 3 2 2 2
0 2 3 1 1 2 3 3 3 3 2 3 2 2 2
1 1 1 0 0 0 0 3 3 2 3 2 3 5 2
2 1 1 1 3 2 1 1 2 3 2 2 2 1 2
5 4 5 4 4 3 2 1 0 3 1 1 0 3 3
4 5 3 4 2 3 3 2 0 3 0 2 2 3 4
4 3 4 3 3 3 3 3 3 2 2 1 1 1 0
0 0 1 0 0 1 2 1 1 0 2 1 1 2 3
4 2 3 3 3 3 3 3 3 1 3 1 0 0 0
4 5 4 4 4 4 5 4 3 4 4 4 5 5 5
2 2 0 2 3 2 2 2 4 3 3 3 4 2 0
0 2 3 1 1 0 0 1 2 3 2 3 3 1 0
5 5 5 4 4 4 3 3 2 1 1 0 2 2 2
1 2 3 2 2 3 3 3 3 3 3 3 3 3 4
1 0 0 1 3 3 3 1 3 2 2 2 1 2 4
5 5 4 4 4 4 3 3 3 3 1 0 1 3 4
3 4 4 4 5 5 5 5 5 5 5 5 5 5 5
0 0 0 0 0 0 0 0 0 1 0 0 1 1 0
1 0 1 1 0 2 2 3 4 5 5 5 4 2 0
2 2 2 4 3 3 3 3 3 3 3 3 3 3 3
0 3 1 1 1 1 1 3 1 1 2 2 2 3 2
3 4 3 4 3 3 5 5 5 1 3 3 2 1 3
2 2 2 3 3 2 2 2 2 2 2 2 2 2 2
4 3 5 5 3 3 3 3 5 4 3 4 4 4 4
0 0 0 0 1 1 2 1 1 2 3 3 2 2 2
4 2 3 1 2 1 1 1 1 1 1 1 1 1 1
5 5 5 5 5 4 3 4 1 2 3 3 3 3 5
1 1 2 2 3 1 0 0 0 3 2 4 4 5 4
3 3 1 1 0 1 1 1 1 1 1 1 1 1 0
5 4 4 3 3 4 5 4 5 5 5 4 4 2 0
Permit holdings, sessions 10-18
Treatment A
Treatment B
Treatment C
periods
periods
periods
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
4 2 3 3 3 4 4 3 4 3 3 3 5 5 5
3 4 4 5 5 5 5 5 5 4 4 4 3 5 3
2 2 3 4 4 3 4 4 4 4 3 2 2 1 5
3 5 3 3 3 3 3 2 3 3 3 4 2 2 2
3 2 1 2 1 0 2 0 1 0 0 2 1 1 4
4 4 3 4 5 4 4 3 3 2 3 3 5 3 5
1 2 2 2 4 4 4 4 3 4 5 5 5 4 4
3 2 4 2 2 5 3 5 3 5 5 3 5 5 2
5 4 4 3 3 2 1 2 1 2 1 1 0 3 2
5 4 3 3 2 2 2 2 2 2 1 1 1 2 2
3 5 4 3 5 4 4 4 4 4 3 4 4 3 5
2 3 1 0 0 3 3 2 2 2 2 2 2 3 3
0 0 3 3 2 2 2 4 3 3 3 2 1 1 1
2 2 2 2 2 1 1 1 2 1 1 1 1 0 0
0 1 3 1 0 2 1 2 2 2 2 4 5 5 0
2 2 1 1 1 0 0 0 0 0 0 0 1 1 1
1 0 0 1 0 0 0 0 0 1 2 1 1 1 1
2 1 1 3 3 1 2 2 3 3 4 3 1 0 0
4 4 4 4 4 5 5 5 4 4 4 4 4 4 4
0 0 0 2 3 3 5 5 5 5 4 2 3 1 1
3 3 3 1 4 2 3 4 3 3 4 1 3 4 2
5 4 5 5 5 5 4 5 5 4 4 4 5 5 4
4 4 2 1 2 1 1 2 1 2 1 3 2 1 1
1 2 1 4 3 3 3 3 5 3 5 4 1 1 3
0 1 1 0 1 0 2 2 3 5 5 5 3 5 4
1 2 4 5 3 3 3 1 1 0 2 1 4 5 5
2 2 2 3 2 3 3 2 3 4 3 4 3 2 2
0 0 0 0 0 0 0 0 0 0 0 0 1 0 3
4 5 5 4 3 2 2 3 4 5 3 3 2 3 3
4 4 3 2 3 5 3 4 3 4 1 3 3 3 5
3 3 2 2 2 1 1 1 1 0 0 1 1 0 0
1 0 0 0 1 1 0 1 0 0 1 1 1 2 2
4 2 4 1 0 1 1 0 1 1 2 1 0 0 0
3 3 3 4 3 4 3 2 2 2 2 1 1 1 0
5 4 4 3 3 5 4 3 4 3 4 5 3 3 3
1 2 2 4 3 1 2 2 0 0 0 2 5 5 3
2 3 2 3 4 4 5 5 5 4 4 3 3 2 5
3 3 3 3 4 5 5 5 4 4 3 4 4 3 3
3 4 4 4 3 4 3 3 3 2 2 3 3 3 2
3 2 3 3 2 2 1 1 1 2 2 1 1 4 3
4 4 3 4 4 4 4 4 2 3 3 3 3 3 3
2 0 0 0 0 0 0 1 4 4 3 3 4 3 3
3 4 3 3 3 3 2 2 2 1 1 0 1 2 3
3 3 2 2 2 2 2 2 2 2 2 2 2 1 1
2 5 5 5 4 3 5 5 4 4 4 3 3 4 5
1 1 1 1 1 1 2 3 3 3 3 5 5 5 3
4 3 2 4 4 3 3 3 2 2 3 3 3 3 3
2 0 0 1 0 0 0 0 0 0 0 0 0 0 1
2 0 2 1 1 2 2 2 2 3 3 4 3 2 1
0 1 4 1 1 0 1 0 5 3 3 2 2 5 5
4 4 4 3 4 5 4 4 3 4 4 4 4 3 4
4 5 4 4 4 3 3 2 2 2 2 2 2 0 0
1 1 1 1 0 1 0 1 0 1 1 1 1 0 0
2 2 2 2 4 3 3 2 1 1 2 2 1 2 0
To sum up ...
Report
TREAT
1.00
2.00
3.00
Total
Mean
N
Std. Deviation
Mean
N
Std. Deviation
Mean
N
Std. Deviation
Mean
N
Std. Deviation
COST_1
3291.6667
6
239.28365
2959.1667
6
242.45446
3294.1667
6
353.19140
3181.6667
18
311.49544
COST_2
3230.0000
6
246.43458
3002.5000
6
323.39991
3312.5000
6
269.92128
3181.6667
18
297.06407
COST_3
3330.8333
6
422.09497
3041.6667
6
295.15533
3337.5000
6
296.66058
3236.6667
18
352.20315
Result 1 : Fees and efficiency
• H0: Aggregate cost equal in all
treatments
• H1: Aggregate cost higher in
treatment A than in treatment
B/C
• No significant difference
between A and C
– Auctioning off permits does not
help
• Significant difference between
A/C and B
– A tax on permit holdings seems
to improve allocative efficiency
(marginally significant)
• A tax scheme performs better
than a auction scheme
Wilcoxon-Mann-Whitney
Nonparametric test of equal medians:
Significance level for rejecting the H0
Periods
1-5
Periods
6-10
Periods
11-15
A vs. B
0.02
0.10
0.09
A vs. C
0.47
0.44
0.26
B vs. C
0.05
0.04
0.04
Result 2: The effect of roles
• H0: For each role in turn, the
number of permits held is the
same in each treatment (last 5
periods)
• H1: One sided (depends on
role)
• No role seems to contribute to
the difference of A and B in
particular
• The difference in C (auction) is
significant for roles 1 and
marginally for 5 and 6
• A simple regression model
indicates:
– With taxes, high cost firms
hold too many permits
– With auction, low cost firms
hold too few permits
Wilcoxon-Mann-Whitney
Nonparametric test of equal medians:
Significance level for rejecting the H0
Test
Role
A vs. B
A vs. C
B vs. C
1
0.43
0.01
0.00
2
0.42
0.47
0.42
3
0.33
0.44
0.23
4
0.27
0.41
0.24
5
0.48
0.07
0.17
6
0.29
0.22
0.06
Observations
• Slow and often no increase in efficiency
over time
• Great variation in outcomes across
sessions within the same treatment
• Compounding mistakes
– One player holds too many permits  other
players hold too few permits
Conclusions (preliminary)
• Even in the absence of transaction costs, a fee on
resource utilization permits matters for allocative
efficiency
– A tax marginally increases efficiency (high cost firms keep
fewer permits)
– A tax scheme performs significantly better than an auction
scheme (fewer permits in low cost firms with auction)
•
Further considerations
–
–
–
–
Elaborate on behavior in different roles
Compare different behavioral explanations, i.e. the anchor effect
Correct for price bubbles and other subjects’ mistakes
Ordered probit model with random effects
Comments and suggestions welcome