 Risky utilitiesJean Rochet and Guillaume Roger Economic Theory, 2016, vol. 62, issue 1, No 16, 382 pages Abstract: Abstract We develop a theory of “risky utilities,” i.e., private firms that manage an infrastructure for public service and that may be tempted to engage in excessively risky activities, such as reducing maintenance expenditures (at the risk of provoking a breakdown of the system) or in speculation (at the risk of incurring massive losses it cannot bear). These risky utilities include financial utilities like exchanges, clearinghouses or payment systems, as well as standard utilities like electricity transmission networks. Continuation of service is essential, so risky utilities cannot be liquidated. The optimal regulatory contract minimizes the social cost among the contracts that steer the firm away from risky activities. It is simple and implemented with a capital (equity) adequacy requirement and a resolution mechanism when that requirement is breached. The social cost function is explicitly computed, and comparative statics can be simply derived. Keywords: Moral hazard; Dynamic contract; Speculation; Capital requirements (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:62:y:2016:i:1:d:10.1007_s00199-015-0919-2 Ordering information: This journal article can be ordered from DOI: 10.1007/s00199-015-0919-2 Access Statistics for this article Economic Theory is currently edited by Nichoals Yanneils More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.