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Quality Controls, License Transferability and the Level of Investment

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  • Ling Hui Tan
  • Kala Krishna
  • Ram Ranjan

Abstract

This paper models investment/entry decisions in a competitive industry that is subject to a quantity control on an input for production. The quantity control is implemented by auctioning licenses for the restricted input (e.g., a pollution permit or a production license). The paper shows that liberalizing the quantity control could reduce investment in the industry under certain circumstances. Furthermore, the level of investment is quite different when licenses are tradable than when they are not. Key factors in the comparison include the elasticity of demand for the final good and the degree of input substitutability. Two examples are computed to illustrate the results.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/206.

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Length: 33
Date of creation: 01 Dec 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/206

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Keywords: Quotas; Quantitative restrictions; Economic models; Import quotas; equation; equations; competitive industry; unit of capital; factor demand; free entry; partial equilibrium; random variable; econometrics; aggregate demand; political economy; random variables; law of large numbers; international trade; intermediate inputs; income losses; transition countries; domestic firms; efficient firms; functional forms; world economy; affected industries;

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  1. Spencer, Barbara J., 1997. "Quota licenses for imported capital equipment: Could bureaucrats ever do better than the market?," Journal of International Economics, Elsevier, vol. 43(1-2), pages 1-27, August.
  2. Batra, Raveendra N & Ullah, Aman, 1974. "Competitive Firm and the Theory of Input Demand under Price Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 537-48, May/June.
  3. Haruna, Shoji, 1992. "The comparative statics of a competitive industry with free entry and uncertainty," Japan and the World Economy, Elsevier, vol. 4(3), pages 239-249, November.
  4. Caballero, Ricardo J, 1991. "On the Sign of the Investment-Uncertainty Relationship," American Economic Review, American Economic Association, vol. 81(1), pages 279-88, March.
  5. Hartman, Richard, 1976. "Factor Demand with Output Price Uncertainty," American Economic Review, American Economic Association, vol. 66(4), pages 675-81, September.
  6. Sandmo, Agnar, 1971. "On the Theory of the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 61(1), pages 65-73, March.
  7. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, vol. 35(1), pages 19-25, February.
  8. Appelbaum, Elie & Katz, Eliakim, 1986. "Measures of Risk Aversion and Comparative Statics of Industry Equilibrium," American Economic Review, American Economic Association, vol. 76(3), pages 524-29, June.
  9. Squires, Dale, 1994. "Firm behavior under input rationing," Journal of Econometrics, Elsevier, vol. 61(2), pages 235-257, April.
  10. Krishna, Kala & Tan, Ling Hui, 1999. "Transferable Licenses versus Nontransferable Licenses: What Is the Difference?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 785-800, August.
  11. Pindyck, Robert S, 1993. "A Note on Competitive Investment under Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 273-77, March.
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