Eric Verhoef: Trading Trips. Using Tradable Permits to Manage Urban Mobility

The idea to use tradable permits for the regulation of road transport externalities has been around for already quite some time (e.g., Verhoef et al., 1997), but it has often been regarded as a theoretical possibility rather than a realistic policy option. An important impediment has always been the transaction costs associated with the trade of permits, especially in situations with a high number of 'atomistic' road users. Moreover, monitoring and securing compliance has traditionally been a concern.

Organised by Development Economics

Thu 29 March 2018 12:30 to 13:30

Venue Leeuwenborch, gebouwnummer 201
Room C82

Still, tradable permits for road transport have received consistent and growing attention in the academic literature (e.g., Akamutsa and Wada, 2017; De Palma et al, 2018; Xiao et al, 2013; Yang and Wang, 2011). The recent upsurge may be explained by at least two factors. One is that rapid technological progress has led to substantial decreases in transaction and monitoring costs, through the possibility of internet trading and automated vehicle detection and monitoring.

The second is that congestion levels have grown substantially over the past years in many locations, owing to the economic upsurge, while the traditional economic response to congestion – road pricing – appears to remain politically and socially unacceptable in many locations. Because tradable permits need not involve a net financial flow from road users to the government, unlike classic pricing, the acceptability of tradable permits is often believed to exceed that of pricing. This may be reinforced by the notion that redistributional concerns can be addressed, through the initial grandfathering of permits, much more directly and in a more flexible way than what is usually feasible for pricing-and-recycling schemes.

It therefore seems the right moment to design and empirically test tradable permit schemes for managing urban mobility. That is what we seek to do. We start with a brief discussion of the economics of tradable mobility permits, focusing in particular on the question of how well this instrument performs in terms of welfare gains, compared to the classical first-best benchmark of road pricing. We will furthermore address under which second-best conditions the instrument is preferred over second-best pricing schemes in terms of efficiency, on top of the expected advantages in terms of acceptability.

We then move on to present a complete design of a market for tradable permits, not only in terms of the conceptual set-up of the market but also its technical implementation. The design is evaluated against a number of criteria, including: the efficiency of the market, transparency and containment of transaction costs, stability of permit prices in relation to equilibrium on the road market, and the prevention of undesirable speculation (as opposed to desirable speculation) and fraud.

We then present evidence of the empirical functioning of this market, using the results of a so-called 'lab-in the field' experiment in which participants traded virtual parking permits, in an experimental game with real financial incentives but virtual mobility behaviour, using a permit market designed according to the principles outlined.