The Complexity Dilemma in Policy Market Design

87 Pages Posted: 28 Jun 2019 Last revised: 20 Jul 2020

See all articles by Todd S. Aagaard

Todd S. Aagaard

Villanova University - Charles Widger School of Law

Andrew N. Kleit

Pennsylvania State University

Date Written: June 26, 2019

Abstract

Regulators are increasingly pursuing their policy objectives by creating markets. To create a policy market, regulators require firms to procure a product that is socially useful but that confers little direct private benefit to the acquiring party. Examples of policy markets include pollutant emissions trading programs, renewable energy credit markets, and electricity capacity markets. Existing scholarship has tended to analyze policy markets simply as market-based regulation. Although not inaccurate, such inquiries are necessarily incomplete because they do not focus on the distinctive traits of policy markets. Policy markets are neither typical regulations nor typical markets. Concentrating on policy markets as a distinctive type of market brings to light common characteristics of such markets, which in turn generates insights into how they can be used more effectively to implement policy. In particular, this Article focuses on a recurring fundamental challenge in policy market design: managing complexity. Typical markets manage complexity through market forces. As a regulatory creation, however, policy markets require regulators to manage their complexity. This poses what we call the complexity dilemma, which requires regulators to balance strong pressures both toward and away from complexity. The central argument of this Article is that although policy markets are an important part of a regulator’s toolkit, they are also subject to complexity that limits their usefulness. Understanding the complexity dilemma and its crucial role in policy market design forms an essential step toward progress in improving the design and function of these markets.

Keywords: policy markets, market-based regulation, emissions trading, capacity markets

JEL Classification: K23, K32, Q48, Q53, Q58

Suggested Citation

Aagaard, Todd S. and Kleit, Andrew N., The Complexity Dilemma in Policy Market Design (June 26, 2019). 30 Duke Envtl. L. & Pol'y F. 1 (2019), Available at SSRN: https://ssrn.com/abstract=3410611

Todd S. Aagaard (Contact Author)

Villanova University - Charles Widger School of Law ( email )

299 N. Spring Mill Road
Villanova, PA 19085
United States
610-519-3001 (Phone)

HOME PAGE: https://www1.villanova.edu/villanova/law/academics/faculty/Facultyprofiles/ToddAagaard.html

Andrew N. Kleit

Pennsylvania State University ( email )

University Park
109 Hosler Building
State College, PA 16802
United States
814-865-0711 (Phone)
814-865-3663 (Fax)

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