Quantity Controls, License Transferability, and the Level of Investment

Author/Editor:

Ling H Tan ; Kala Krishna ; Ram Ranjan

Publication Date:

December 1, 2001

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper models investment/entry decisions in a competitive industry that is subject to a quantity control on an input for production. The quantity control is implemented by auctioning licenses for the restricted input (e.g., a pollution permit or a production license). The paper shows that liberalizing the quantity control could reduce investment in the industry under certain circumstances. Furthermore, the level of investment is quite different when licenses are tradable than when they are not. Key factors in the comparison include the elasticity of demand for the final good and the degree of input substitutability. Two examples are computed to illustrate the results.

Series:

Working Paper No. 2001/206

Subject:

Agroindustries Asset prices Commodity markets Demand elasticity Economic sectors Economic theory Financial markets Prices Production Productivity

English

Publication Date:

December 1, 2001

ISBN/ISSN:

9781451874600/1018-5941

Stock No:

WPIEA2062001

Pages:

33

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