Each participant plays the role of a firm that must make decisions about inputs to be used in production. One input, selected in advance, generates a sunk cost, and a second input determines variable costs. In addition, a regulation requires a permit for each unit of output produced (e.g. an emissions allowance). These permits may be distributed as an endowment that can be used, bought, or sold. Using this input incurs an opportunity cost, even if the input is not purchased. Output market options include sale at a fixed price or price competition in an environment that satisfies incentive compatibiliby conditions for accurate cost revelation (proxy bidding with an exogenous "market price"). For related research, see "Pass-through Effects with Emissions Allowances" (Burtraw et al., 2007).

The dots line tracks the extent to which the opportunity cost of permits is incorporated into the price, when permits are received at no cost via "grandfathering" in treatment 1, and when some permits must be purchased in a market in treatment 2. The learning in this session was facilitated by the provision of relative earnings rankings in the second half of each treatment.