The Pursuit of Revenue Reduction: An Experimental Analysis of the Shanghai License Plate Auction

Monthly auctions of vehicle licenses in Shanghai were reconfigured in 2008 in an attempt to reduce prices by giving bidders the option of modifying initial bids. The modified bids are required to be within a narrow band around the lowest accepted bid at that point. The bidding constraints limit price competition, and therefore, allocation efficiency may be degraded if intended revenue reductions are achieved. The effectiveness of the new procedures, however, is unclear in light of sharp subsequent increases in license prices, even after the license quota was doubled. This paper reports a laboratory experiment designed to evaluate the revenue and efficiency consequences of the new Shanghai auction format. I. Introduction Auctions are commonly used in the private sector to create competition by grouping buyers together in a thick market with a clear time focus. In the public sector, auctions are attractive because they combine non-economic benefits (fairness, speed, and transparency) with economic benefits (revenue generation and allocative efficiency), bypassing the transactions costs of non-market procedures, e.g. waiting in line (Holt and Sherman, 1982) or “rent-seeking” in all-pay lobbying contests. 1 Even when other