Working Paper: NBER ID: w8796
Authors: Kala Krishna; Ling Hui Tan; Ram Ranjan
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. 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: quantity controls; license transferability; investment
JEL Codes: F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Liberalizing quantity controls (P22) | Investment levels (G31) |
| Transferability of licenses (D45) | Investment levels (G31) |
| Tradable licenses (D45) | Investment levels (G31) |