Do security deposit rates matter: Evidence from a secondary market

In the recent past, many economies, attempting to become more open, have adopted policies fostering a less restrictive trade regime. In their attempts to become more open, policy makers can, with the best of intentions, adopt policies that have unforeseen and often undesirable side effects. In the 1980s, Australia was in the process of converting quotas to tariffs. In the process they auctioned off import quota licenses in order to use the submitted bids to calculate equivalent tariff rates. A security deposit was charged to prevent frivolous bidding. The collection of security deposits may be seen as a harmless policy with the only discernable cost being the opportunity cost of the funds while they are on deposit. We argue that, at least in the Australian context, this is not so. Using data from a middleman in the secondary market for these licenses, we show that the policy may have led to welfare losses in the secondary market.