The Effect of Initial Lease Periods on Price Discovery in Laboratory Tradable Fishing Allowance Markets

When new tradable fishing allowance markets are established, they are often accompanied by a period of high price volatility. These fluctuations play a significant role in determining the outcomes for the traders involved, and for the investment decisions that allowance holders make when using noisy price signals. This paper reports an evaluation of two market design features that may reduce volatility during price discovery: a uniform price auction, which ensures that all trades within a period take place at the same price, and an initial lease period, which prohibits permanent allowance transfers and allows participants to learn about market fundamentals without making irreversible decisions. The results of the laboratory experiments suggest that the joint implementation of these rules significantly improves performance of the permanent transfer market, and that most of the benefit arises from the initial lease period. JEL: Q22, Q28, G12