IDEAS home Printed from https://ideas.repec.org/a/inm/ordeca/v9y2012i2p156-164.html
   My bibliography  Save this article

Regulation Games Between Government and Competing Companies: Oil Spills and Other Disasters

Author

Listed:
  • May Cheung

    (Department of Industrial and Systems Engineering, University at Buffalo, Buffalo, New York 14260)

  • Jun Zhuang

    (Department of Industrial and Systems Engineering, University at Buffalo, Buffalo, New York 14260)

Abstract

Oil spills are a characteristic risk of oil drilling and production. There are safety regulations set to reduce the risk of technological failures and human error. It is the oil company's decision to follow such laws and the government's decision to enforce them. Companies are balancing between safety efforts and production competition with other companies. To our knowledge, no previous research has considered the impact of competition in a government--company regulatory game. This paper fills the gap by modeling and comparing two games: a one-company game without competition and a two-company game with competition, both with the government as a regulator. The objectives of all players are to maximize their expected revenue and minimize their losses. Our results indicate that competition increases a company's threshold for risk and therefore requires stricter government regulation. These results could be generalized and applied to other industries including airline, nuclear power, and coal mining.

Suggested Citation

  • May Cheung & Jun Zhuang, 2012. "Regulation Games Between Government and Competing Companies: Oil Spills and Other Disasters," Decision Analysis, INFORMS, vol. 9(2), pages 156-164, June.
  • Handle: RePEc:inm:ordeca:v:9:y:2012:i:2:p:156-164
    DOI: 10.1287/deca.1120.0233
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/deca.1120.0233
    Download Restriction: no

    File URL: https://libkey.io/10.1287/deca.1120.0233?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Cohen, Mark A, 1987. "Optimal Enforcement Strategy to Prevent Oil Spills: An Application of a Principal-Agent Model with Moral Hazard," Journal of Law and Economics, University of Chicago Press, vol. 30(1), pages 23-51, April.
    2. Steven Shavell, 1984. "A Model of the Optimal Use of Liability and Safety Regulation," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 271-280, Summer.
    3. Gautam Gowrisankaran, 2002. "Competition and regulation in the airline industry," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan18.
    4. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    5. Jun Zhuang & Vicki M. Bier, 2007. "Balancing Terrorism and Natural Disasters---Defensive Strategy with Endogenous Attacker Effort," Operations Research, INFORMS, vol. 55(5), pages 976-991, October.
    6. Kambhu, John, 1990. "Direct controls and incentives systems of regulation," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages 72-85, March.
    7. Polinsky, Mitchell & Shavell, Steven, 1979. "The Optimal Tradeoff between the Probability and Magnitude of Fines," American Economic Review, American Economic Association, vol. 69(5), pages 880-891, December.
    8. Surabhi Kadambe & Kathleen Segerson, 1998. "On the Role of Fines as an Environmental Enforcement Tool," Journal of Environmental Planning and Management, Taylor & Francis Journals, vol. 41(2), pages 217-226.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kjell Hausken & Jun Zhuang, 2016. "The strategic interaction between a company and the government surrounding disasters," Annals of Operations Research, Springer, vol. 237(1), pages 27-40, February.
    2. Jason R. W. Merrick & Fabrizio Ruggeri & Refik Soyer & L. Robin Keller, 2012. "From the Editors---Games and Decisions in Reliability and Risk," Decision Analysis, INFORMS, vol. 9(2), pages 81-85, June.
    3. Shitao Gong & Xin Gao & Zhou Li & Linyan Chen, 2021. "Developing a Dynamic Supervision Mechanism to Improve Construction Safety Investment Supervision Efficiency in China: Theoretical Simulation of Evolutionary Game Process," IJERPH, MDPI, vol. 18(7), pages 1-29, March.
    4. Cameron A. MacKenzie & Hiba Baroud & Kash Barker, 2016. "Static and dynamic resource allocation models for recovery of interdependent systems: application to the Deepwater Horizon oil spill," Annals of Operations Research, Springer, vol. 236(1), pages 103-129, January.
    5. Kumar, Sourabh & Kumar Barua, Mukesh, 2022. "Modeling and investigating the interaction among risk factors of the sustainable petroleum supply chain," Resources Policy, Elsevier, vol. 79(C).
    6. Cameron MacKenzie & Hiba Baroud & Kash Barker, 2016. "Static and dynamic resource allocation models for recovery of interdependent systems: application to the Deepwater Horizon oil spill," Annals of Operations Research, Springer, vol. 236(1), pages 103-129, January.
    7. Hausken, Kjell & Zhuang, Jun, 2013. "The impact of disaster on the strategic interaction between company and government," European Journal of Operational Research, Elsevier, vol. 225(2), pages 363-376.
    8. Agarwal, Puneet & Aziz, Ridwan Al & Zhuang, Jun, 2022. "Interplay of rumor propagation and clarification on social media during crisis events - A game-theoretic approach," European Journal of Operational Research, Elsevier, vol. 298(2), pages 714-733.
    9. Shandong Mou & Kexin Zhong & Yamin Ma, 2023. "Regulating the Big Data-Based Discriminatory Pricing in Platform Retailing: A Tripartite Evolutionary Game Theory Analysis," Mathematics, MDPI, vol. 11(11), pages 1-21, June.
    10. Peiqiu Guan & Jun Zhuang, 2015. "Modeling Public–Private Partnerships in Disaster Management via Centralized and Decentralized Models," Decision Analysis, INFORMS, vol. 12(4), pages 173-189, December.
    11. Puneet Agarwal & Kyle Hunt & Shivasubramanian Srinivasan & Jun Zhuang, 2020. "Fire Code Inspection and Compliance: A Game-Theoretic Model Between Fire Inspection Agencies and Building Owners," Decision Analysis, INFORMS, vol. 17(3), pages 208-226, September.
    12. Huijie Li & Deqing Tan, 2024. "How to Control Waste Incineration Pollution? Cost-Sharing or Penalty Mechanism—Based on Two Differential Game Models," Decision Analysis, INFORMS, vol. 21(2), pages 91-109, June.
    13. Daniel Seaberg & Laura Devine & Jun Zhuang, 2017. "A review of game theory applications in natural disaster management research," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 89(3), pages 1461-1483, December.
    14. Vicki M. Bier & Yuqun Zhou & Hongru Du, 2020. "Game-theoretic modeling of pre-disaster relocation," The Engineering Economist, Taylor & Francis Journals, vol. 65(2), pages 89-113, April.
    15. Cen Song & Jun Zhuang, 2018. "Modeling Precheck Parallel Screening Process in the Face of Strategic Applicants with Incomplete Information and Screening Errors," Risk Analysis, John Wiley & Sons, vol. 38(1), pages 118-133, January.
    16. Kjell Hausken & Jun Zhuang, 2016. "How companies and governments react to disasters," Journal of Risk and Reliability, , vol. 230(4), pages 417-426, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bartsch, Elga, 1996. "Enforcement of environmental liability in the case of uncertain causality and asymmetric information," Kiel Working Papers 755, Kiel Institute for the World Economy (IfW Kiel).
    2. Vicki M. Bier & Shi‐Woei Lin, 2013. "Should the Model for Risk‐Informed Regulation be Game Theory Rather than Decision Theory?," Risk Analysis, John Wiley & Sons, vol. 33(2), pages 281-291, February.
    3. Arguedas, Carmen & Rousseau, Sandra, 2009. "A note on the complementarity of uniform emission standards and monitoring strategies," Working Papers 2009/12, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
    4. Arguedas, Carmen & Rousseau, Sandra, 2012. "Learning about compliance under asymmetric information," Resource and Energy Economics, Elsevier, vol. 34(1), pages 55-73.
    5. Siebert, Horst, 1989. "Liability issues in pollution control," Kiel Working Papers 350, Kiel Institute for the World Economy (IfW Kiel).
    6. Walter A Cont, 2001. "Essays on Contract Design: Delegation and Agency Problems, and Monitoring Under Collusion," Levine's Working Paper Archive 625018000000000122, David K. Levine.
    7. Lin, Shi-Woei, 2010. "Self-reporting mechanism for risk regulation," Journal of Business Research, Elsevier, vol. 63(5), pages 528-534, May.
    8. B. Caillaud & R. Guesnerie & P. Rey & J. Tirole, 1988. "Government Intervention in Production and Incentives Theory: A Review of Recent Contributions," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 1-26, Spring.
    9. Edward L. Glaeser & Andrei Shleifer, 2003. "The Rise of the Regulatory State," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 401-425, June.
    10. Dongryul Lee & Kyung Hwan Baik, 2017. "Concealment and verification over environmental regulations: a game-theoretic analysis," Journal of Regulatory Economics, Springer, vol. 51(3), pages 235-268, June.
    11. Boyd, James, 1996. "Banking on "Green Money:" Are Environmental Financial Responsibility Rules Fulfilling Their Promise?," RFF Working Paper Series dp-96-26, Resources for the Future.
    12. Dietrich Earnhart, 2000. "Environmental “Citizen Suits” in the Czech Republic," European Journal of Law and Economics, Springer, vol. 10(1), pages 43-68, July.
    13. Franckx, Laurent, 2002. "The Use of Ambient Inspections in Environmental Monitoring and Enforcement When the Inspection Agency Cannot Commit Itself to Announced Inspection Probabilities," Journal of Environmental Economics and Management, Elsevier, vol. 43(1), pages 71-92, January.
    14. Nuno Garoupa, 2004. "Punish Once or Punish Twice: A Theory of the Use of Criminal Sanctions in Addition to Regulatory Penalties," American Law and Economics Review, American Law and Economics Association, vol. 6(2), pages 410-433.
    15. Rousseau, Sandra, 2009. "Empirical Analysis of Sanctions for Environmental Offenses," International Review of Environmental and Resource Economics, now publishers, vol. 3(3), pages 161-194, December.
    16. Earnhart, Dietrich, 2004. "Regulatory factors shaping environmental performance at publicly-owned treatment plants," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 655-681, July.
    17. Dietrich Earnhart, 1998. "Civil Litigation, Access to Government-Held Information, and Coordination of Public and Private Enforcement in the Czech Republic," European Journal of Law and Economics, Springer, vol. 6(2), pages 113-141, September.
    18. Nakashima, Kiyotaka & Ogawa, Toshiaki, 2020. "The Impacts of Strengthening Regulatory Surveillance on Bank Behavior: A Dynamic Analysis from Incomplete to Complete Enforcement of Capital Regulation in Microprudential Policy," MPRA Paper 99938, University Library of Munich, Germany.
    19. Antonio Acconcia & Marcello D'Amato & Riccardo Martina, 2003. "Corruption and Tax Evasion with Competitive Bribes," CSEF Working Papers 112, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    20. Miceli Thomas J. & Segerson Kathleen, 2013. "Liability versus Regulation for Dangerous Products When Consumers Vary in Their Susceptibility to Harm and May Misperceive Risk," Review of Law & Economics, De Gruyter, vol. 9(3), pages 341-355, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ordeca:v:9:y:2012:i:2:p:156-164. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.