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Regulatory Policy Design in an Uncertain World

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  • ROBERT G. CHAMBERS
  • TIGRAN A. MELKONYAN

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. Copyright © 2010 Wiley Periodicals, Inc..

Suggested Citation

  • Robert G. Chambers & Tigran A. Melkonyan, 2010. "Regulatory Policy Design in an Uncertain World," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 12(6), pages 1081-1107, December.
  • Handle: RePEc:bla:jpbect:v:12:y:2010:i:6:p:1081-1107
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    References listed on IDEAS

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    Cited by:

    1. Zheng, Mingli & Wang, Chong & Li, Chaozheng, 2015. "Optimal nonlinear pricing by a monopolist with information ambiguity," International Journal of Industrial Organization, Elsevier, vol. 40(C), pages 60-66.

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