Tradable deficit permits: a way to ensure sub-national fiscal discipline?

Marie-Laure Breuillé ()
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Marie-Laure Breuillé: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper proposes a system of tradable deficit permits for implementing budgetary austerity at the local level. We evaluate the efficiency of the fiscal retrenchment allocation in a dynamic setting with a commitment problem. The way rights are allcated and traded on the market turns out to be decisive for the cost-effectiveness of the system. Indeed, the inability of the State to commit dynamically to a sharing rule of deficit rights generates perverse incentives which affect the local market. The market turns out to be ineffcient - with heterogeneous jurisdictions - unless the State allows local decision-makers to trade permits through time.

Keywords: Policy Coordination; Tradable Permits Market; Soft budget constraint (search for similar items in EconPapers)
Date: 2007
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