Trading for the Future: Signaling in Permit Markets

Bard Harstad and Gunnar Eskeland

No 1429, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: Tradable permits are celebrated as a political instrument since they allow (i) firms to equalize marginal abatement costs through trade and (ii) the government to distribute the burden of the policy in a politically fair and feasible way. These two concerns, however, conflict in a dynamic setting. Anticipating that high-cost firms will receive more permits in the future, firms purchase excessive amounts of permits to signal high costs. This raises the price above marginal costs and distorts abatements. In fact, it is better with non-tradable permits if the heterogeneity between the firms is small, if the (shadow) price for permits is large, and if the government redistributes permits frequently.

Keywords: Tradable permits; private information; signaling (search for similar items in EconPapers)
Date: 2006-12
New Economics Papers: this item is included in nep-ene and nep-env
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Trading for the future: Signaling in permit markets (2010)
Working Paper: Trading for the Future: Signaling in Permit Markets (2010)
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