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Bankruptcy Risk and the Performance of Tradable Permit Markets

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  • John K. Stranlund

    () (Department of Resource Economics, University of Massachusetts Amherst)

  • Wei Zhang

    () (Department of Resource Economics, University of Massachusetts Amherst)

Abstract

We study the impact of bankruptcy risk on markets for tradable environmental and natural resource permits. We find that firms that risk bankruptcy demand more permits than if they were financially secure. Consequently, bankruptcy risk in a competitive market for tradable property rights causes an inefficient distribution of individual choices among regulated firms. Moreover, the equilibrium distribution of permits is not independent of the initial distribution of permits. In fact, the inefficiency that is associated with bankruptcy risk is mitigated if financially insecure firms are given a larger share of the initial allocation of permits.

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File URL: http://courses.umass.edu/resec/workingpapers/documents/ResEcWorkingPaper2007-9.pdf
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Bibliographic Info

Paper provided by University of Massachusetts Amherst, Department of Resource Economics in its series Working Papers with number 2007-9.

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Length: 20 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:dre:wpaper:2007-9

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Web page: http://www.umass.edu/resec/
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Keywords: bankruptcy; tradable permits; permit markets;

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