The EPA has designed a new call auction institution for trading allowances to emit sulfur dioxide.
This paper reports twelve laboratory markets that investigate trader behavior in this new institution
and evaluate its performance relative to the more commonly observed uniform price call market.
We find that the uniform price call market (1) is more efficient, (2) induces more truthful revelation
of underlying values and costs, (3) provides more accurate price information, and (4) is more
responsive to and recovers more quickly from changes in underlying market conditions. All of
these differences result from the intense strategic manipulation incentives of the EPA auction.
Under -the EPA auction rules both buyers and sellers misrepresent their true value of the emission
permits, which biases market-clearing prices downwards. This suggests that the EPA auction will
provide poor price signals to the evolving allowance market
