Regulating a Firm under Adverse Selection and Moral Hazard in Uncertain Environment
This paper investigates a problem of how to regulate a firm which has private information about the market capacity, leading to adverse selection, and which can increase the market demand by exerting costly effort, resulting in moral hazard. In such a setting, the regulator offers a regulatory polic...
Saved in:
| Main Authors: | , , |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
Wiley
2014-01-01
|
| Series: | Abstract and Applied Analysis |
| Online Access: | http://dx.doi.org/10.1155/2014/419207 |
| Tags: |
Add Tag
No Tags, Be the first to tag this record!
|
| _version_ | 1832560561169104896 |
|---|---|
| author | Jing Feng Yanfei Lan Ruiqing Zhao |
| author_facet | Jing Feng Yanfei Lan Ruiqing Zhao |
| author_sort | Jing Feng |
| collection | DOAJ |
| description | This paper investigates a problem of how to regulate a firm which has private information about the market capacity, leading to adverse selection, and which can increase the market demand by exerting costly effort, resulting in moral hazard. In such a setting, the regulator offers a regulatory policy to the firm with the objective of maximizing a weighted sum of the consumer surplus and the firm’s profit (i.e., the social total surplus). We firstly find that the regulator will set the firm’s effort level as zero under observable effort regardless of the market capacity being full or private information; that is, the effort has no impact on the optimal regulatory policy. Interestingly, we also show that, it is necessary for regulator to consider the difference between the effort’s impact on the demand and the price’s impact on the demand, which may generate different distortion effects about the regulatory policy. |
| format | Article |
| id | doaj-art-e44b4810ddba4a52a35d8da6007c6cff |
| institution | Kabale University |
| issn | 1085-3375 1687-0409 |
| language | English |
| publishDate | 2014-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Abstract and Applied Analysis |
| spelling | doaj-art-e44b4810ddba4a52a35d8da6007c6cff2025-02-03T01:27:16ZengWileyAbstract and Applied Analysis1085-33751687-04092014-01-01201410.1155/2014/419207419207Regulating a Firm under Adverse Selection and Moral Hazard in Uncertain EnvironmentJing Feng0Yanfei Lan1Ruiqing Zhao2Institute of Systems Engineering, Tianjin University, Tianjin 300072, ChinaInstitute of Systems Engineering, Tianjin University, Tianjin 300072, ChinaInstitute of Systems Engineering, Tianjin University, Tianjin 300072, ChinaThis paper investigates a problem of how to regulate a firm which has private information about the market capacity, leading to adverse selection, and which can increase the market demand by exerting costly effort, resulting in moral hazard. In such a setting, the regulator offers a regulatory policy to the firm with the objective of maximizing a weighted sum of the consumer surplus and the firm’s profit (i.e., the social total surplus). We firstly find that the regulator will set the firm’s effort level as zero under observable effort regardless of the market capacity being full or private information; that is, the effort has no impact on the optimal regulatory policy. Interestingly, we also show that, it is necessary for regulator to consider the difference between the effort’s impact on the demand and the price’s impact on the demand, which may generate different distortion effects about the regulatory policy.http://dx.doi.org/10.1155/2014/419207 |
| spellingShingle | Jing Feng Yanfei Lan Ruiqing Zhao Regulating a Firm under Adverse Selection and Moral Hazard in Uncertain Environment Abstract and Applied Analysis |
| title | Regulating a Firm under Adverse Selection and Moral Hazard in Uncertain Environment |
| title_full | Regulating a Firm under Adverse Selection and Moral Hazard in Uncertain Environment |
| title_fullStr | Regulating a Firm under Adverse Selection and Moral Hazard in Uncertain Environment |
| title_full_unstemmed | Regulating a Firm under Adverse Selection and Moral Hazard in Uncertain Environment |
| title_short | Regulating a Firm under Adverse Selection and Moral Hazard in Uncertain Environment |
| title_sort | regulating a firm under adverse selection and moral hazard in uncertain environment |
| url | http://dx.doi.org/10.1155/2014/419207 |
| work_keys_str_mv | AT jingfeng regulatingafirmunderadverseselectionandmoralhazardinuncertainenvironment AT yanfeilan regulatingafirmunderadverseselectionandmoralhazardinuncertainenvironment AT ruiqingzhao regulatingafirmunderadverseselectionandmoralhazardinuncertainenvironment |