Quantity controls, license transferability, and the level of investment

Kala M. Krishna, Ling Hui Tan, Ram Ranjan

    Research output: Contribution to journalArticle

    Abstract

    This paper models investment/entry decisions in a competitive industry that is subject to a quantity control, either on output or on a production input. The quantity control is implemented via the sale of licenses for the restricted output/input. We show that liberalizing the quantity control could reduce investment in the industry under certain circumstances. Furthermore, the level of investment in the industry is different depending on whether the licenses are tradable or not. Key factors to consider are the elasticity of demand for the final good and the degree of input substitutability. Two examples are presented to illustrate the results.

    Original languageEnglish
    Pages (from-to)457-485
    Number of pages29
    JournalContributions to Economic Analysis and Policy
    Volume3
    Issue number1
    Publication statusPublished - 2004

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