Bankruptcy Risk and the Performance of Tradable Permit Markets

John Stranlund () and Wei Zhang

No 2007-9, Working Papers from University of Massachusetts Amherst, Department of Resource Economics

Abstract: We study the impact of bankruptcy risk on markets for tradable environmental and natural resource permits. We find that firms that risk bankruptcy demand more permits than if they were financially secure. Consequently, bankruptcy risk in a competitive market for tradable property rights causes an inefficient distribution of individual choices among regulated firms. Moreover, the equilibrium distribution of permits is not independent of the initial distribution of permits. In fact, the inefficiency that is associated with bankruptcy risk is mitigated if financially insecure firms are given a larger share of the initial allocation of permits.

Keywords: bankruptcy; tradable permits; permit markets (search for similar items in EconPapers)
JEL-codes: L51 Q28 Q58 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2007-09
New Economics Papers: this item is included in nep-ene and nep-env
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Related works:
Journal Article: Bankruptcy risk and the performance of tradable permit markets (2008)
Working Paper: Bankruptcy Risk and the Performance of Tradable Permit Markets (2007)
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