This paper proposes a system of tradable deficit permits for implementing budgetary austerity at the local level. We evaluate the efficiency of the fiscal retrenchment
allocation in a dynamic setting with a commitment problem. The way rights are allcated and traded on the market turns out to be decisive for the cost-effectiveness of the
system. Indeed, the inability of the State to commit dynamically to a sharing rule of
deficit rights generates perverse incentives which affect the local market. The market
turns out to be ineffcient – with heterogeneous jurisdictions – unless the State allows
local decision-makers to trade permits through time.