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Permits to Elicit Information

Author

Listed:
  • Luttmer, Erzo F. P.

    (Harvard U)

  • Zeckhauser, Richard
  • Kousky, Carolyn

Abstract

This paper identifies a novel function for permits: they can be used by the government as an instrument to elicit information about the intentions of private investors to put capital into an area. Such information is a crucial input for the government’s decision on how much infrastructure to build in an area, such as the capacity of an elementary school or a public transit system in an expanding community. Decisions on infrastructure that protects against natural disasters require precisely this information. For example, a levee should be built higher and stronger the more capital it will protect. Current experience in New Orleans makes this evident, particularly given the considerable uncertainties about the private sector’s intention of returning to or investing in areas at risk. Permits can replace unreliable “cheap talk” elicitation devices, such as surveys or town meetings, and can be used as an input into prediction or futures markets. An important innovation in our procedure is to use markets to elicit information separately from hedgers (the investors in our model) and speculators.

Suggested Citation

  • Luttmer, Erzo F. P. & Zeckhauser, Richard & Kousky, Carolyn, 2006. "Permits to Elicit Information," Working Paper Series rwp06-049, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp06-049
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    File URL: https://research.hks.harvard.edu/publications/workingpapers/citation.aspx?PubId=4309&type=WPN
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    References listed on IDEAS

    as
    1. Carolyn Kousky & Erzo Luttmer & Richard Zeckhauser, 2006. "Private investment and government protection," Journal of Risk and Uncertainty, Springer, vol. 33(1), pages 73-100, September.
    2. Peter A. Diamond & Jerry A. Hausman, 1994. "Contingent Valuation: Is Some Number Better than No Number?," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 45-64, Fall.
    3. James Murphy & P. Allen & Thomas Stevens & Darryl Weatherhead, 2005. "A Meta-analysis of Hypothetical Bias in Stated Preference Valuation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 30(3), pages 313-325, March.
    4. Min Ding & Rajdeep Grewal & John Liechty, 2005. "Incentive-aligned conjoint analysis," Framed Field Experiments 00139, The Field Experiments Website.
    5. Karl E. Case & Robert J. Shiller & Allan N. Weiss, 1991. "Index-Based Futures and Options Markets in Real Estate," Cowles Foundation Discussion Papers 1006, Cowles Foundation for Research in Economics, Yale University.
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