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Tradable deficit permits: a way to ensure sub-national fiscal discipline?

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  • Marie-Laure Breuillé

Abstract

This paper proposes a system of tradable deficit permits for implementing budgetary austerity at the local level. We evaluate the efficiency of the fiscal retrenchment allocation in a dynamic setting with a commitment problem. The way rights are allcated and traded on the market turns out to be decisive for the cost-effectiveness of the system. Indeed, the inability of the State to commit dynamically to a sharing rule of deficit rights generates perverse incentives which affect the local market. The market turns out to be ineffcient - with heterogeneous jurisdictions - unless the State allows local decision-makers to trade permits through time.

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File URL: http://economix.fr/pdf/dt/2007/WP_EcoX_2007-17.pdf
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Bibliographic Info

Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2007-17.

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Length: 27 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:drm:wpaper:2007-17

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Keywords: Policy Coordination; Tradable Permits Market; Soft budget constraint;

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  1. Bohringer, Christoph & Lange, Andreas, 2005. "On the design of optimal grandfathering schemes for emission allowances," European Economic Review, Elsevier, vol. 49(8), pages 2041-2055, November.
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