Collusion in Auctions for Emissions Permits: An Experimental Study

Abstract

Environmental markets have several institutional features that provide a new context for the use of auctions and that have not been studied previously. This paper reports on laboratory experiments testing three auction forms — uniform and discriminatory price sealed-bid auctions and an ascending clock auction. We test the ability of subjects to tacitly or explicitly collude in order to maximize profits. Our main result is that the discriminatory and uniform price auctions produce greater revenues than the clock auction, both with and without explicit communication. The clock appears to facilitate successful collusion, both because of its sequential structure and because it allows bidders to focus on one dimension of cooperation (quantity) rather than two (price and quantity).