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Essays in Mechanism Design and Environmental Regulation

  • Author(s): Zaragoza-Watkins, Matthew David
  • Advisor(s): Auffhammer, Maximilian
  • et al.
Abstract

This dissertation consists of three studies analyzing the challenges of mechanism design in the context of environmental regulation. Each study focuses on the unanticipated outcomes that arise due to behavioral responses by agents subject to a particular policy instrument.

In Chapter 1, I analyze the welfare consequences of post-allocation resale for a class of mechanisms that are commonly used to allocate goods. When initial allocations are inefficient, agents will often organize secondary markets to facilitate redistribution. If these agents are forward-looking, their actions to influence the primary allocation and participation in the secondary market will be interdependent. I study how interdependence affects predictions about strategic behavior and welfare in a model of the first-price all-pay auction with two bidders with asymmetric private-value distributions. Asymmetric value distributions commonly generate inefficient allocations, which motivates my analysis of resale. Resale occurs via a take-it-or- leave-it offer made by the auction winner - a best response, given the losing bidder's private value remains unknown. Adding a resale stage increases expected revenue in the auction stage, where opportunity for post-auction trade motivates the stronger bidder to bid less aggressively and the weaker bidder to bid more aggressively - each of which are forms of rent-seeking. Somewhat surprisingly, the mutual incentive to rent-seek causes the equilibrium bidding strategies and bid distributions to converge. These results suggest that models of strategic interactions that conclude in an inefficient allocation, when resale can produce a Pareto improvement, may provide less accurate predictions about equilibrium behavior than what has previously been believed. Moreover, models where the initial allocation mechanism relies on costly effort (e.g. lobbying) to allocate rents may understate the social cost of the initial allocation.

In Chapter 2, my co-authors and I study the implications of alternative forms of cap-and-trade regulations on the California electricity market. Specific focus is given to the implementation of a downstream form of regulation known as the first- deliverer policy. Under this policy, importers (i.e. first-deliverers) of electricity into California are responsible for the emissions associated with the power plants from which the power originated, even if those plants are physically located outside of California. We find that, absent strict non-economic barriers to changing import patterns, such policies are extremely vulnerable to reshuffling of imported resources. The net impact implies that the first-deliverer policies will be only marginally more effective than a conventional source-based regulation.

In Chapter 3, I evaluate the effectiveness of a regional environmental policy targeting local air pollution from the transportation sector. In the United States, air pollution from light-duty vehicles is controlled via new-vehicle emissions standards complemented by inspection and maintenance programs. One unintended consequence of this approach is that it likely causes millions of motorists to operate "fugitive" vehicles in regions where registration is tied to meeting emission standards. I study a program operated in California's San Joaquin Valley, which attempts to abate air-pollution and bring "fugitive" vehicles into compliance by offering repair subsidies to motorists of high-emitting vehicles. One concern with this policy is that it may be highly susceptible to gaming by motorists seeking to fund infra-marginal repairs (i.e. free-riders). Exploiting quasi-random variation in the likelihood of participation, I estimate causal effects of the treatment for vehicle emission and registration rates, via instrumental variables. I find that the treatment lowers CO emission rates by 30%, HC emission rates by 19%, and NOx emission rates by 20%, and increases the likelihood of registration by 52%. Comparing these estimates with the "naive" estimate (i.e. the pre-to-post-treatment difference), I find that 22% to 36% of emissions rate improvements are infra-marginal. These results are surprisingly low, given the relatively high repair-completion rate among motorists that do not attempt to access the subsidy program. It is likely that the significant time-commitment required to participate in the program functions as a screening mechanism, consistent with a model in which motorists with lower values of time are also less likely to independently complete pollution-control equipment repairs.

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