Tarrifying Auctions

Preston R. McAfee, Wendy Takacs, and Daniel R. Vincent , The RAND Journal of Economics , 1999.

In trying to convert quotas to tariffs, a strategy that has sometimes been proposed is to auction the quota rights, then use the realized auction prices as a guide to setting tariffs. In the 1980's, New Zealand employed discriminatory price auctions to allocate quota licenses.  We analyze the relationship between the tariff-equivalent and realized auction prices for auctions of quota licenses with resale.  Using panel data from New Zealand's quota license auctions we provide estimates of the expected value of the tariff equivalent. We also exploit data from secondary market prices for the licenses to test some predictions of the model. The predictions of theory are shown to fail suggesting either that auction prices may substantially understate or that aftermarket prices substantially overstate the true tariff equivalent. We explore possible explanations for this failure.

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