Bankruptcy Risk and the Performance of Tradable Permit Markets

We study the impact of bankruptcy risk on markets for tradable environmental and natural resource permits. We find that firms that risk bankruptcy demand more permits than if they were financially secure. Consequently, bankruptcy risk in a competitive market for tradable property rights causes an inefficient distribution of individual choices among regulated firms. Moreover, the equilibrium distribution of permits is not independent of the initial distribution of permits. In fact, the inefficiency that is associated with bankruptcy risk is mitigated if financially insecure firms are given a larger share of the initial allocation of permits.


Issue Date:
2007
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/7384
Total Pages:
20
JEL Codes:
L51; Q28; Q58
Series Statement:
ResEc Working Paper
2007-9




 Record created 2017-04-01, last modified 2017-08-23

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