Quantity Controls, License Transferability, and the Level of Investment

33 Pages Posted: 14 Feb 2006

See all articles by Kala Krishna

Kala Krishna

Pennsylvania State University - Department of Economics; National Bureau of Economic Research (NBER)

Ling Hui Tan

International Monetary Fund (IMF) - European Department

Ram Ranjan

University of Florida Institute of Food and Agricultural Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: December 2001

Abstract

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.

Keywords: Quotas, licensing, transferability, tradable quotas, entry, investment

JEL Classification: D45, D21, F13, L51

Suggested Citation

Krishna, Kala and Tan, Ling Hui and Ranjan, Ram, Quantity Controls, License Transferability, and the Level of Investment (December 2001). IMF Working Paper No. 01/206, Available at SSRN: https://ssrn.com/abstract=880859

Kala Krishna (Contact Author)

Pennsylvania State University - Department of Economics ( email )

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Ling Hui Tan

International Monetary Fund (IMF) - European Department ( email )

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Ram Ranjan

University of Florida Institute of Food and Agricultural Sciences ( email )

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