Transferable Licenses vs. Nontransferable Licenses: What is the Difference?

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This paper questions the presumption that transferable quota licenses are worth more and result in higher welfare. We show that the price of a transferable license will tend to be higher than that of its nontransferable counterpart only if the underlying quota is quite restrictive. Despite this, if consumer surplus and license revenue have equal weight in the welfare function, transferability is preferable to nontransferability. If their weights are unequal, then the comparison could go either way. We also show that increased uncertainty, in the form of a mean preserving spread, does not affect the license price under nontransferability and could raise or lower the level of the license price with transferability depending on the restrictiveness of the quota.

Published: International Economic Review, Vol. 40, no.3 (1999): 785-800.

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