Using history dependence to design a dynamic tradeable quota system under market imperfections

Abstract

A transferable quota system is analysed in a two-period model with market power. So far, the management mechanisms presented in the literature to remedy market power have either not succeeded in securing efficiency in the distribution of quota within and across time periods, or have resulted in only one of the two inefficiencies being eliminated. In this paper a new mechanism is introduced where allocation of quota is made dependent upon historic quota acquisitions. This opens for a trade-off between distributional and time efficiency, or under specific circumstances securing overall efficiency.