Markets and regulatory hold-up problems

Journal Article · Mon Mar 01 04:00:00 EST 1999 · Journal of Environmental Economics and Management

DOI:https://doi.org/10.1006/jeem.1998.1063· OSTI ID:338461

Gersbach, H ^[1]; Glazer, A ^[2]

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1. Univ. Heidelberg (Germany). Alfred-Weber-Inst.
2. Univ. of California, Irvine, CA (United States). Dept. of Economics

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. The authors 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.

• OSTI ID: 338461
• Journal Information: Journal of Environmental Economics and Management, Journal Name: Journal of Environmental Economics and Management Journal Issue: 2 Vol. 37; ISSN JEEMDI; ISSN 0095-0696
• Country of Publication: United States
• Language: English

Related Subjects

29 ENERGY PLANNING, POLICY, AND ECONOMY
ENVIRONMENTAL POLICY
INVESTMENT
LICENSES
POLLUTION ABATEMENT
POLLUTION REGULATIONS