Interdependent value multi-unit auctions for initial allocation of emission permits

Auctions have been shown to be able to tackle the efficient allocation of initial emission permits, but most of existing works only consider the problem with private values. They can not deal with the information externalities that each polluter's value depends on his own private information as well as the information of other polluters. In this paper, we model the allocation problem of initial emission permits as a multi-unit auction with interdependent values and propose a mechanism. First, we give the assumptions, i.e., each polluter is allowed to submit a series of marginal value functions which are declining in the number of units allocated, each polluter's signal to marginal values is independent private information and his marginal values are interdependent. Second, we establish a designing model for efficient multi-unit auction mechanism with interdependent values according to above assumptions. Third, we get the auction mechanism by solving this model and give the detail steps to show how to implement the auction mechanism in practice. Finally, we give an application example to show the operability of the auction mechanism proposed by this paper. The conclusion can be drawn that our auction mechanism can prevent polluters from cheating in the auction, achieve the social welfare optimization, and provide the environmental management departments with the theoretical basis and reference methods to realize the fairness and effectiveness of initial allocation of emission permits. (C) 2016 The Authors. Published by Elsevier B.V.