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Regulatory Policy Design in an Uncertain World
Author(s) -
CHAMBERS ROBERT G.,
MELKONYAN TIGRAN A.
Publication year - 2010
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/j.1467-9779.2010.01486.x
Subject(s) - zero (linguistics) , regulator , principal (computer security) , economics , set (abstract data type) , payment , quality (philosophy) , microeconomics , marginal utility , transformation (genetics) , best practice , econometrics , mathematical economics , actuarial science , computer science , finance , biology , philosophy , biochemistry , linguistics , epistemology , gene , programming language , operating system , management
The paper examines principal–agent relationships in uncertain environments where beliefs of the contracting parties (the regulator and the firm) are represented by sets of probabilities. In addition to fully characterizing the first‐best and the second‐best solutions, we examine optimality of zero‐risk, fixed‐payment schemes and the relationship between the first‐best and the second‐best solutions. In the second‐best world, where the regulator can only contract on the quality of the good, a zero‐risk standard is optimal when the firm has beliefs that are so ambiguous that the firm’s marginal rate of transformation belongs to the set of the firm’s relative probabilities.