Markets and regulatory hold-up problems

Hans Gersbach and Amihai Glazer

University of California Transportation Center, Working Papers from University of California Transportation Center

Abstract: Many regulatory programs such as environmental regulation are effective only if firms make irreversible investments that reduce the cost of compliance. A firm potentially subject to regulation may therefore behave strategically by not investing, thereby forcing the regulator to void the proposed regulation. We show that such incentives, which resemble a hold-up problem, may not be overcome when governmentââ¬â¢s only tool is the imposition of an emissions tax. The hold-up problem can be overcome by the issuance of tradeable permits. A time-consistent equilibrium exists with all firms investing and the government imposing regulations, even if no permits are traded and their market price is low. Indeed, an observation of no trade may indicate that pollution abatement is great.

Keywords: Architecture (search for similar items in EconPapers)
Date: 1998-10-28
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Related works:
Journal Article: Markets and Regulatory Hold-Up Problems (1999)
Working Paper: Markets and regulatory hold-up problems (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:cdl:uctcwp:qt9gf9t35g

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