Bankruptcy risk and the performance of tradable permit markets

Abstract

We study the impacts of bankruptcy risk on markets for tradable environmental and natural resource permits. We show that bankruptcy risk in a competitive market for tradable permits causes an inefficient distribution of these permits among firms. Moreover, the equilibrium distribution of permits is dependent of the initial distribution of permits. Thus, the main reasons for implementing markets for environmental and natural resource rights do not hold when some firms are financially insecure.Limited liability