Dynamic Mechanism Design for a Global Commons Problem
Roger Lagunoff*, Rodrigo Harrison
Last modified: 2013-04-15
Abstract
This paper examines optimal mechanisms for dealing a global commons problem with a dynamic ``usage externality." A leading example is carbon consumption. At each date, each country derives simultaneous benefit both from the use and the aggregate conservation of an open access resource. Countries benefit from conservation because it allows them to avoid the environmental costs of resource consumption. The relative benefits of consumption compared to conservation are summarized by a privately observed parameter --- the country's resource type --- which evolves stochastically each period. We characterize the constrained-efficient resource quota when neither truthful disclosure nor compliant resource use is presumed. Not surprisingly, with complete information the optimal quota allocates more of the resource each period to countries with high value of consumption (and low value for conservation). However, under incomplete information, the optimal quota is invariant to the country's resource type in any period. In the case of $\mbox{CO}_2$, this means that countries with higher than average carbon requirements receive the same allocation as those with lower than average requirements. We refer to this as the property of {\em extreme quota compression}, and show that extreme compression is robust to the distributional process on shocks.