Mechanism Design in Environmental Economics

PakSing Choi

My research adopts a game-theoretic approach to address pressing issues in environmental economics. My first chapter, Conservation Procurement Auctions with Bidirectional Externalities, studies agency problems in procurement auctions where participants and non-participants impose external effects on each other. I show that each market failure, that is, asymmetric information or externalities, deviates optimal output away from the first best outcome. However, these effects can occur in different directions implying that the regulator can achieve the first-best outcome when negative conservation externalities are minor. In this setting, nonparticipants are subject to higher operating costs, thus facing stronger incentives to participate in the conservation project. My second chapter, Optimal Monitoring in Procurement Auctions, studies procurement auctions under two layers of information asymmetries: (i) unobservable efficiency, such as production costs; and (ii) imperfectly observable output, that is, contract performance. In an incomplete information setting, the regulator implements a Direct Revelation Mechanism to induce truthful reporting of bidders’ types and a stochastic monitoring mechanism with penalties to induce compliance. I show that the procurer seeks fewer units of output when information asymmetries co-exist, but output distortion is minimized if he implements contracts in settings where bidders are generally more efficient and the costs of monitoring and implementing penalties are relatively low. My third chapter, Merger between green and brown firms, considers a duopoly, where I allow for three types of asymmetries between firms: product differentiation, cost asymmetries, and pollution intensities (green and brown goods). I first evaluate firms’ incentives to merge under no regulation, and then analyze how these incentives are affected by the introduction of environmental regulation. I show that the green (brown) firm finds a merger more (less) profitable when the regulator offers subsidies on the former and charges emission fees on the latter to control externalities. In this regard, firms have higher incentives to merge when goods are more differentiated, costs are more symmetric, and environmental damages are low.

Mechanism Design in Environmental Economics

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