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Optimal risk regulation of monopolists with subjective risk assessment

Author

Listed:
  • Daiki Kishishita

    (Tokyo University of Science)

  • Susumu Sato

    (Hitotsubashi University)

Abstract

This study characterizes the optimal regulation of risky activities when the assessment of the probability of an accident is subjective. The optimism of stakeholders forms subjective risk perceptions, which substantially affect the optimal intervention. To explore this issue, we construct a moral hazard model with a limited liability constraint, where stakeholders have heterogeneous beliefs about the probability of an accident. First, we show that the optimism of a monopolist reduces the level of the preventive effort when regulatory instruments are fixed. We then analyze the case in which the regulator can set both a fine and a product price as regulatory instruments. The optimal product price increases with the monopolist’s degree of optimism, as the loose product market regulation encourages the preventive effort of the optimistic monopolist. Consequently, under such an optimal scheme, an increase in the optimism of the monopolist may increase the level of preventive effort.

Suggested Citation

  • Daiki Kishishita & Susumu Sato, 2021. "Optimal risk regulation of monopolists with subjective risk assessment," Journal of Regulatory Economics, Springer, vol. 59(3), pages 251-279, June.
  • Handle: RePEc:kap:regeco:v:59:y:2021:i:3:d:10.1007_s11149-021-09429-0
    DOI: 10.1007/s11149-021-09429-0
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    1. Takao Asano & Hiroyuki Kojima & Kaname Miyagishima, 2022. "A Simple Axiomatization of Neo-Additive Choquet Expected Utility Theory on a Finite State Space," KIER Working Papers 1080, Kyoto University, Institute of Economic Research.

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    More about this item

    Keywords

    Monopoly regulation; Environmental risk; Ambiguity; Risk assessment; Moral hazard;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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