|
| |
| Robert G. Chambers and Tigran A. Melkonyan |
| |
| ''Regulatory Policy Design in an Uncertain World'' |
| ( 2010, Vol. 12 No.6 ) |
| |
| |
| 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-riskstandard 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. |
| |
| |
| Keywords: principal-agent relationship, standards, ambiguity, Knightian uncertainty, Maximin Expected Utility |
JEL: D8 - Information, Knowledge, and Uncertainty: General
H0 - Public Economics: General |
| |
| Manuscript Received : Oct 22 2008 | | Manuscript Accepted : Mar 07 2012 |
|
