Regulating an agent with different beliefs

Nicolas Treich and François Salanié

University of California at Santa Barbara, Economics Working Paper Series from Department of Economics, UC Santa Barbara

Abstract: There is some evidence that people have biased perceptions of risks, such as lethal or environmental risks. Hence their behavior is based on beliefs which may di¤er from the ’objective’ beliefs used by a regulator. The opti-mal regulation then depends on this difference in beliefs. We set up a general framework and study this policy change. It turns out that, in many situations, the policy change depends on the absolute ’distance’ between beliefs, and not on whether agents over-estimate or under-estimate risks. We characterize the necessary and su¢cient condition for ’more distant’ beliefs to always reduce the regulator’s decision. We apply and extend that condition in several ways.

Date: 2002-03-12
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Working Paper: Regulating an agent with different beliefs (2002)
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