Marketable Permits, Market Power, and Cheating

In this paper, we present a model of a noncompliant firm operating in a marketable pollution permit market. In the main result of the paper, we show how compliance is related to the initial distribution of permits. A firm with market power will cheat less the larger its endowment of permits is from a fixed stock of permits. The competitive fringe, however, will cheat more as its endowment of permits is reduced, generating an ambiguous global impact on cheating.