Weyl and Zhang, ‘Depreciating Licenses’

Many governments assign use licenses for natural resources, such as radio spectrum, fishing rights, and mineral extraction rights, through auctions or other market-like mechanisms. License design affects resource users’ investment incentives, as well as the efficiency of asset allocation. No existing license design achieves first-best outcomes on both dimensions. Long-term licenses have high-investment incentives, but impede reallocation to high-valued entrants. Short-term licenses improve allocative efficiency but discourage investment. We propose a simple new mechanism, the depreciating license, and we argue that it navigates this tradeoff more effectively than existing license designs.

Weyl, Eric Glen and Zhang, Anthony Lee, Depreciating Licenses (September 24, 2020).

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