Regulating a Firm under Adverse Selection and Moral Hazard in Uncertain Environment

Jing Feng, Yanfei Lan and Ruiqing Zhao

Abstract and Applied Analysis, 2014, vol. 2014, 1-12

Abstract:

This paper investigates a problem of how to regulate a firm which has private information about the market capacity, leading to adverse selection, and which can increase the market demand by exerting costly effort, resulting in moral hazard. In such a setting, the regulator offers a regulatory policy to the firm with the objective of maximizing a weighted sum of the consumer surplus and the firm’s profit (i.e., the social total surplus). We firstly find that the regulator will set the firm’s effort level as zero under observable effort regardless of the market capacity being full or private information; that is, the effort has no impact on the optimal regulatory policy. Interestingly, we also show that, it is necessary for regulator to consider the difference between the effort’s impact on the demand and the price’s impact on the demand, which may generate different distortion effects about the regulatory policy.

Date: 2014
References: Add references at CitEc
Citations:

Downloads: (external link)
http://downloads.hindawi.com/journals/AAA/2014/419207.pdf (application/pdf)
http://downloads.hindawi.com/journals/AAA/2014/419207.xml (text/xml)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hin:jnlaaa:419207

DOI: 10.1155/2014/419207

Access Statistics for this article

More articles in Abstract and Applied Analysis from Hindawi
Bibliographic data for series maintained by Mohamed Abdelhakeem ().