An Allocatively Efficient Auction Market for Payment Entitlements?

We discuss the allocative efficiency of the market for the so-called Payment Entitlements that resulted from EU regulation no 796/2004 of the European agricultural policy. In particular we consider the existing market in Denmark and discuss the design of an allocative efficient auction market. The complexity of the market follows directly from initial construction of the payment entitlements, which resulted in a very large number of different payment entitlements. Although the valuation of the different payment entitlements are highly interrelated, they are separate goods that should be priced separately. We show how this complexity makes an allocative efficient auction market practically impossible and we suggest a simplified auction market that can improve the pricing and the transparency on the market for payment entitlements.