Abstract

The results of eleven three-part experiments provide data on the performance of a voluntary, unanimity, bidding mechanism (EXTERN) for private, public and externality goods. The important feature of this mechanism is that all of its information requirements are endogenous. All of the private and externality good experiments reached unanimity agreement; nine of the public good experiments reached agreement. Measures of demand revelation tended to be lower for the private good than the public good. This tendency carried over into the private and public components of the externality experiments which lowered allocative efficiency.

Introduction

In this paper we propose and test experimentally a decentralized mechanism, called EXTERN, for allocating a good whose aggregate production (= consumption) yields an external benefit (or cost) for each agent. Examples of such goods include commons models such as cattle grasslands or fisheries where aggregate consumption affects individual consumption, information models such as advertising or mineral exploration where individual and pooled information is valuable to each firm, and pollution models where aggregate consumption of a commodity creates a classic external diseconomy.

The classical correctional procedure for externalities is for a central authority to use taxes (or subsidies) to internalize the costs (or benefits) due to external effects. More recently, as a means of reducing the administrative burden of regulation, marketable pollution licenses have been proposed for industrial emissions and transferable catch quotas for ocean fisheries.