ECONOMIC IMPLEMENTATION THEORY : AN APPLICATION TO THE COE QUOTA SYSTEM

Abstract

This paper focuses on applying the theory of implementation to examine the COE bidding system in Singapore. The objective of implementation theory is to design a mechanism by specifying the rules and payoffs, such that, the equilibrium outcome of the mechanism will be the socially desirable outcome. We are concern with the efficiency of the social choice rule. Equity and fairness will not be discussed in this paper. We will be applying the game theoretic concept to predict the outcomes of the mechanism. There are many types of mechanism. But the main mechanism discuss in this thesis uses the Nash equilibrium. For such an equilibrium concept, every agent will choose the strategy that maximizes his payoff given what others are doing. The COE bidding system is an example of a mechanism. The vehicle quota system was implemented in 1990 when the indirect control by increasing the price of vehicles proved inefficient. This is because the demand for cars has been much more income elastic than price elastic. Hence, curbing the prices of cars to overcome overconsumption becomes relatively ineffective. Under the vehicle quota system, the number of cars are directly regulated by the government while the price is determined by the market. Our main aim is, are we able to structure the interaction of individuals in such a way that the Nash equilibrium strategy in the COE bidding process will always give an efficient allocation. If we are able to design such a mechanism, this mechanism is said to implement an efficient social choice rule. In fact, from the paper, we are able to show that by having a rule to break the tie, this can be achieved.