Regulatory Policy Design in an Uncertain World

Robert Chambers () and Tigran Melkonyan ()

Journal of Public Economic Theory, 2010, vol. 12, issue 6, 1081-1107

Abstract: 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.

Date: 2010
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https://doi.org/10.1111/j.1467-9779.2010.01486.x

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