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

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Author Info
Marie-Laure Breuillé

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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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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
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Handle: RePEc:drm:wpaper:2007-17

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Related research
Keywords: Policy Coordination Tradable Permits Market Soft budget constraint

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Find related papers by JEL classification:
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
H6 - Public Economics - - National Budget, Deficit, and Debt
H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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    Other versions:
  13. J. Kornai & E. Maskin & G. Roland., . "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki".
    Other versions:
  14. Cronshaw, Mark B & Brown-Kruse, Jamie, 1996. "Regulated Firms in Pollution Permit Markets with Banking," Journal of Regulatory Economics, Springer, vol. 9(2), pages 179-89, March.
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