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Do security deposit rates matter: Evidence from a secondary market

Listed author(s):
  • Susumu Imai

    (Concordia University)

  • Kala Krishna

    (Pennsylvania State University)

  • Abhiroop Mukhopadhyay


    (Indian Statistical Institute, New Delhi)

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.

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Paper provided by Indian Statistical Institute, New Delhi, India in its series Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers with number 05-02.

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Length: 44 pages
Date of creation: Dec 2004
Handle: RePEc:ind:isipdp:05-02
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  1. Daniel F. Spulber, 1996. "Market Making by Price-Setting Firms," Review of Economic Studies, Oxford University Press, vol. 63(4), pages 559-580.
  2. Krishna, Kala & Tan, Ling Hui, 1996. "The dynamic behavior of quota license prices," Journal of Development Economics, Elsevier, vol. 48(2), pages 301-321, March.
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