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Markets and regulatory hold-up problems

  • Gersbach, Hans
  • Glazer, Amihai

Many regulatory programs such as environmental regulation are effective only if firms make irreversible investments that reduce the cost of compliance. A firm potentially subject to regulation may therefore behave strategically by not investing, thereby forcing the regulator to void the proposed regulation. We show that such incentives, which resemble a hold-up problem, may not be overcome when government’s only tool is the imposition of an emissions tax. The hold-up problem can be overcome by the issuance of tradeable permits. A time-consistent equilibrium exists with all firms investing and the government imposing regulations, even if no permits are traded and their market price is low. Indeed, an observation of no trade may indicate that pollution abatement is great.

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Paper provided by University of California Transportation Center in its series University of California Transportation Center, Working Papers with number qt76f9604n.

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Date of creation: 01 Jan 1999
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Handle: RePEc:cdl:uctcwp:qt76f9604n
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  1. Yao, Dennis A., 1988. "Strategic responses to automobile emissions control: A game-theoretic analysis," Journal of Environmental Economics and Management, Elsevier, vol. 15(4), pages 419-438, December.
  2. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
  3. Malik, Arun S., 1991. "Permanent versus interim regulations: A game-theoretic analysis," Journal of Environmental Economics and Management, Elsevier, vol. 21(2), pages 127-139, September.
  4. Varian, H,R., 1991. "A Solution to the Problem of Externalities when Agents are Well-Informed," Papers 10, Michigan - Center for Research on Economic & Social Theory.
  5. Matsuyama, Kiminori, 1990. "Perfect Equilibria in a Trade Liberalization Game," American Economic Review, American Economic Association, vol. 80(3), pages 480-92, June.
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  7. van Egteren, Henry & Weber, Marian, 1996. "Marketable Permits, Market Power, and Cheating," Journal of Environmental Economics and Management, Elsevier, vol. 30(2), pages 161-173, March.
  8. Staiger, Robert W & Tabellini, Guido, 1987. "Discretionary Trade Policy and Excessive Protection," American Economic Review, American Economic Association, vol. 77(5), pages 823-37, December.
  9. Biglaiser, Gary & Horowitz, John K & Quiggin, John, 1995. "Dynamic Pollution Regulation," Journal of Regulatory Economics, Springer, vol. 8(1), pages 33-44, July.
  10. Urbiztondo, Santiago, 1994. "Investment without Regulatory Commitment: The Case of Elastic Demand," Journal of Regulatory Economics, Springer, vol. 6(1), pages 87-96, February.
  11. Jung, Chulho & Krutilla, Kerry & Boyd, Roy, 1996. "Incentives for Advanced Pollution Abatement Technology at the Industry Level: An Evaluation of Policy Alternatives," Journal of Environmental Economics and Management, Elsevier, vol. 30(1), pages 95-111, January.
  12. Laffont, J.J. & Tirole, J., 1995. "Pollution Permits and Environmental Innovation," Papers 95.396, Toulouse - GREMAQ.
  13. Milliman, Scott R. & Prince, Raymond, 1989. "Firm incentives to promote technological change in pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 17(3), pages 247-265, November.
  14. David J. Salant & Glenn A. Woroch, 1992. "Trigger Price Regulation," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 29-51, Spring.
  15. Williamson, Oliver E, 1983. "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, American Economic Association, vol. 73(4), pages 519-40, September.
  16. Till Requate, 1995. "Incentives to adopt new technologies under different pollution-control policies," International Tax and Public Finance, Springer, vol. 2(2), pages 295-317, August.
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