Sellers' hedging incentives at EPA's emission trading auction

Bouwe Dijkstra and Marco Haan

No 99C08, Research Report from University of Groningen, Research Institute SOM (Systems, Organisations and Management)

Abstract: Cason (1993)argued thattheauction theEPAused in order to start the market for sulfur allowances, is not efficient. The set-up of the auction gives both buyers and sellers an incentive to understate their valuation of an allowance. In this paper, we show that the sellers’ incentives are even more perverse than Cason suggested. In particular, we show that sellers have an incentive to set their ask price equal to zero, while simultaneously hedging their bets by submitting a positive bid. It is not possible to derive the Nash equilibrium for this set-up. If such an equilibrium exists, sellers either set only a positive ask price, or an ask price equal to zero, and a positive bid as well.

Date: 1999
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Related works:
Journal Article: Sellers' Hedging Incentives at EPA's Emission Trading Auction (2001)
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