Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171525
Authors: 
MacKenzie, Ian A.
Hanley, Nick
Kornienko, Tatiana
Year of Publication: 
2008
Series/Report no.: 
Economics Working Paper Series 08/82
Abstract: 
In this paper we advocate a new initial allocation mechanism for a tradable pollution permit market. We outline a Permit Allocation Contest (PAC) that distributes permits to firms based on their rank relative to other firms. This ranking is achieved by ordering firms based on an observable 'external action' where the external action is an activity or characteristic of the firm that is independent of their choice of emissions in the tradeable permit market. We show that this mechanism efficiently allocates permits and, as a result, the tradeable permit market is cost-effective. We determine the symmetric equilibrium strategy of each firm in choosing their external action and find the choice is influenced by the firm's cost structure and the regulator's choice of permit allocation schedule (distribution of permits to the market). Furthermore, we investigate the factors that determine the regulator's choice of optimal permit allocation schedules.
Subjects: 
Rank-order contests
pollution permits
initial allocation
JEL: 
D44
Q25
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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