Trading for the Future: Signaling in Permit Markets

Posted: 7 Sep 2007 Last revised: 24 Apr 2017

See all articles by Bård Harstad

Bård Harstad

Stanford Graduate School of Business

Gunnar S. Eskeland

Norwegian School of Economics (NHH) - Department of Business and Management Science; Foundation for Research in Economics and Business Administration

Date Written: May 1, 2010

Abstract

Permit markets are celebrated as a policy instrument since they allow (i) firms to equalize marginal costs through trade and (ii) the regulator to distribute the burden in a politically desirable way. These two concerns, however, may conflict in a dynamic setting. Anticipating the regulator's future desire to give more permits to firms that appear to need them, firms purchase permits to signal their need. This raises the price above marginal costs and the market becomes inefficient. If the social cost of pollution is high and the government intervenes frequently in the market, the distortions are greater than the gains from trade and non-tradable permits are better. The analysis helps to understand permit markets and how they should be designed.

Keywords: Tradable permits, time inconsistency, plan vs. market

JEL Classification: H23, Q58, P48, D82

Suggested Citation

Harstad, Bard and Eskeland, Gunnar S., Trading for the Future: Signaling in Permit Markets (May 1, 2010). Journal of Public Economics, Vol. 94, 2010, Available at SSRN: https://ssrn.com/abstract=1012468 or http://dx.doi.org/10.2139/ssrn.1012468

Bard Harstad (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
94305
United States

Gunnar S. Eskeland

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway
+4755959699 (Phone)

Foundation for Research in Economics and Business Administration ( email )

Breiviksveien 40
Bergen, N-5045
Norway
+47 55959699 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
887
PlumX Metrics