The Chinese EPA's objective is to reduce pollution emissions. Given political constraints on the ability to collect revenue from existing firms, and given financial constraints on new firms' ability to pay, we argue that there is an incentive for the Chinese EPA to find a market institution for pollution permits that generates trading volume in excess of the competitive equilibrium trading volume. Similar incentives exist in some more familiar markets, for example, with imperfectly competitive brokerage firms. The matching market institution may have been intended to maximize trading volume. It matches the highest bid with the highest remaining ask less than or equal to it.
Buyers pay their bid prices and sellers receive bid prices.
In particular, the Marshallian theory predicts excessive trading volume under the matching institution but the other theories do not. The main performance variables are market efficiency, profits, price, and trading volume. We find that the subject pool and the international demand shocks have little impact on market outcomes. A later stage of the analysis will test models of individual behavior that can account for the outcome differences.