Tradable Planning Permits to Control Land Development in Germany: A Laboratory Testbed Experiment

Abstract

This article reports on the results of a market experiment with a trading system, where several municipalities in Germany were obliged to submit ‘planning permits’ for land development outside existing planning boundaries. This study was motivated by current literature proposals for the design of a nationwide permit scheme and tests this market-based policy with 11 communities in the Hanover Region. Subjects were equipped with specific field data about future building areas and their fiscal impact on community budgets for the period 2010–2024. The experiment consisted of two sessions, the first with urban planners and the second with students. The researchers set a proposed regulatory target and varied the initial allocation method for permits across two treatments. Prior to trading, permits were periodically allocated via grandfathering or increasingly substituted by auctions. Results show that a permit scheme could realize substantial cost savings compared with alternative command and control standards, even under market power (MP) conditions. Market efficiency and gains from trade were lower in the planner session. The substitution of permit auctioning for grandfathering did not lead to significant differences in price development, MP and efficiency.