Subsidies in cap-and-trade regulation: can society benefit and who captures them?
Abstract: This paper presents a model of firm entry in an industry managed with an aggregate production quota or cap-and-trade (CAT) regulation. Entrepreneurs are heterogeneous in productivity and need to borrow to invest. Banks require collateral to prevent potential moral hazard. First-best is achieved when no entrepreneurs are constrained by collateral requirements. When first-best is impossible, subsidies can improve social efficiency by alleviating financing constraints that distort entry and production patterns. We compare two commonly observed subsidies: quota subsidy v.s. fixed-cost subsidy and discuss their distributional impact.
Capacity coordination and strategic underproduction under cap-and-trade
Abstract: This paper studies a two-stage game of cap-and-trade (CAT) regulated production. In the first stage, firms engage in Nash bargaining to trade quotas; in the second stage, firms compete in a Cournot fashion, with each firm’s quantity not exceeding its quota. When the total quota is set above a threshold, strategic underproduction will arise, raising industry profits yet reducing consumer surplus and potentially distorting production efficiency. We study a regulatory countermeasure of quota ownership limits and identify conditions under which introducing ownership limits can improve welfare. An analysis of the U.S. west coast groundfish fishery, which is regulated under CAT with limits on the accumulation of fishing permits by individual entities, is provided as a simulation exercise.
Allocative preference and allocation procedure
Abstract: The market ranks agents based on their willingness to pay and allocates resources accordingly. However, the designer may not like the result, especially if her goal departs from revenue maximization. This paper studies an allocation problem where the designer tries to assign scarce resources to agents. The designer has preferences on allocation outcomes. Agents are characterized by multi-dimensional attributes, some of which are costly observable. I compare several commonly observed allocation procedures and show, in general, how to choose a procedure given resource scarcity, agents' demographics, designer's allocative preference and screening budget.
Working in progress:
Targeted advertising : will better targeting lead to more advertisement?
Abstract: Online platforms typically operate in two-sided markets comprising a consumer-facing market for digital services and a market for online advertising. This paper presents a general equilibrium model and investigates how improved ad targeting ability, which facilitates the matching between firms and consumers, changes the equilibrium advertisement quantity. Using total surplus from both the digital market and the good market as the welfare measure, I also discuss how the market provision of web service/advertising differs from the optimal provision.
Roommate problem : pick your room and split the bill
Abstract: Two grad students are sharing a 2-bedroom apartment. The apartment and its rent are given. Students are making proposals alternatively to decide who will take which room and how to split the rent. Delays are costly. Willingness to pay for each room are private information, but it is common knowledge that one bedroom is superior to the other. This paper tries to find the equilibrium strategy and discuss whether or when misallocation can happen due to strategic behavior.