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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.

Suggested Citation

  • Marie-Laure Breuillé, 2007. "Tradable deficit permits: a way to ensure sub-national fiscal discipline?," EconomiX Working Papers 2007-17, University of Paris Nanterre, EconomiX.
  • Handle: RePEc:drm:wpaper:2007-17
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    File URL: http://economix.fr/pdf/dt/2007/WP_EcoX_2007-17.pdf
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    References listed on IDEAS

    as
    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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    More about this item

    Keywords

    Policy Coordination; Tradable Permits Market; Soft budget constraint;

    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; Insider Trading
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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