Regulatory authorities generally find that part of the information they need for implementing an efficient regulation is in the hands of those who are to be regulated. Regulating externalities such as access to common resources (e.g., clean air, water streams, and fisheries) is a good example. Environmental regulators know little about firms' pollution abatement costs, so without communicating with firms, they would be unable to establish the efficient level of pollution. A number of mechanisms have been proposed for inducing firms to reveal their private information, but for different reasons, these mechanisms have been of limited use. In this paper, I propose a simple mechanism that implements the first-best for any number of incompletely informed firms: a uniform-price sealed-bid auction of an endogenous number of (transferable) licenses with a fraction of the auction revenues given back to firms. Paybacks, which rapidly decrease with the number of firms, are such that truth-telling is a dominant strategy regardless of whether firms behave noncooperatively or collusively.
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