Regulating a Risk-Averse Firm Under Incomplete Information
نویسنده
چکیده
We examine the optimal regulatory policy for a risk-averse rm when the rm is imperfectly informed about its e¢ ciency parameter for a project at the time of contracting. The rms risk aversion shifts the optimal regulatory policy from a xed-price contract to a cost-plus contract. The optimal regulatory policy entails undere¤ort by an ine¢ cient rm as in Lafont and Tirole (1986) and the e¤ort distortion increases as the rm becomes more risk-averse. Further, the regulator bene ts from sequential contracting with the rm where the rm chooses contract terms gradually as it acquires information, albeit the bene t diminishes as the rm becomes more risk-averse. Keywords: Risk-Aversion, Incomplete Information, Regulation JEL classi cation: D8, L5 Tel: 1-618-453-5347; Fax: 1-618-453-2717; Email address: [email protected].
منابع مشابه
Investment and Information Value for a Risk Averse Firm Nov 8 Libraries St1tute Investment and Information Value for a Risk Averse Firm
This paper analyzes the problem faced by a risk-averse firm considering how much to invest in a risky project. The firm receives a signal about the value of the project. We derive necessary and sufficient conditions on the signal distribution such that (i) the agent's investment is nondecreasing in the realization of the signal, and (ii) different signals can be ranked according to their ex ant...
متن کاملExecutive Stock Options as a Screening Mechanism
We study how and when option grants can be the optimal compensation to screen low-ability executives. In a dynamic setting, we consider the problem of a risk-neutral firm that tries to hire a risk-averse executive whose actions can affect the expected return and volatility of the stock price. Even if the optimal compensation for all types of executives is stock under complete information, it mi...
متن کاملInvestment and Information Value for a Risk Averse Firm
This paper analyzes the problem faced by a risk-averse firm considering how much to invest in a risky project. The firm receives a signal about the value of the project. We derive necessary and sufficient conditions on the signal distribution such that (i) the agent’s investment is nondecreasing in the realization of the signal, and (ii) different signals can be ranked according to their ex ant...
متن کاملOptimal Output for the Regret-Averse Competitive Firm Under Price Uncertainty
We study the optimal output of a competitive firm under price uncertainty. Instead of assuming a risk-averse firm, we assume that the firm is regret-averse. We find that optimal output under uncertainty would be lower than under certainty. We also prove that optimal output could increase or decrease when the regret factor varies.
متن کاملThe Impact of Yield-Dependent Trading Costs on Pricing and Production Planning Under Supply Uncertainty
T paper studies the role of the yield-dependent trading cost structure influencing the optimal choice of the selling price and production quantity for a firm that operates under supply uncertainty in the agricultural industry. The firm initially leases farm space, but its realized amount of fruit supply fluctuates because of weather conditions, diseases, etc. At the end of the growing season, t...
متن کامل