Markets and regulatory hold-up problems
AbstractMany regulatory programs such as environmental regulation are effective only if firms make irreversible investments that reduce the cost of compliance. A firm potentially subject to regulation may therefore behave strategically by not investing, thereby forcing the regulator to void the proposed regulation. We show that such incentives, which resemble a hold-up problem, may not be overcome when governmentÃƒÂ¢Ã¢Â‚Â¬Ã¢Â„Â¢s only tool is the imposition of an emissions tax. The hold-up problem can be overcome by the issuance of tradeable permits. A time-consistent equilibrium exists with all firms investing and the government imposing regulations, even if no permits are traded and their market price is low. Indeed, an observation of no trade may indicate that pollution abatement is great.
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Bibliographic InfoPaper provided by University of California Transportation Center in its series University of California Transportation Center, Working Papers with number qt9gf9t35g.
Date of creation: 28 Oct 1998
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- Gersbach, Hans & Glazer, Amihai, 1999. "Markets and regulatory hold-up problems," University of California Transportation Center, Working Papers qt76f9604n, University of California Transportation Center.
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