Rationing supply capacity shocks: A laboratory comparison of second best mechanisms

This chapter compares four methods of rationing an input that is subject to supply capacity shocks. We describe the application of the mechanisms in terms of electricity. The mechanisms we test are random interruption, priority service, proportional service%all option and proportional service/put option. None of the mechanisms, as implemented, are first-best but can be ranked by their theoretical allocative efficiency. According to the theory, both versions of proportional service should produce the highest allocative efficiency whereas random interruption ranks lowest. In the laboratory, the two proportional mechanisms have radically different behavioral properties. The proportional/put option mechanism performed as predicted by theory. In spite of its theoretical superiority to random interruption and priority service, the proportional/call option mechanism performed no better than random interruption in the laboratory.