Regulating a risk-averse firm under incomplete information

Dai, Chifeng

doi:10.1007/s11149-008-9059-y

Cited by 3 publications

(2 citation statements)

References 5 publications

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“…For example, Zeckhauser (1970), Spence and Zeckhauser (1971), Holmstrom (1979), Shavell (1979), and Grossman and Hart (1983) among others consider optimal risk sharing in the presence of moral hazard problems, and Salanié (1990) studies optimal risk sharing in the presence of adverse selection problems. Laffont and Rochet (1998), Theilen (2003), and Dai (2008) study optimal risk sharing under both adverse selection and moral hazard problems. In all these studies, the optimal contracts critically depend on the risk preference of the contracting parties.…”

Section: Introductionmentioning

confidence: 99%

Optimal risk sharing with ex post private information: Rules versus discretion

Dai

2022

Southern Economic Journal

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We consider the optimal contract under cost uncertainty between a risk averse buyer and a risk averse supplier when the supplier can privately discover more cost information after contracting but before production. We show that the optimal contract is often characterized by distortions and rules which restrict the supplier from adjusting the production schedule to the cost realization. The supplier is often constrained by strict rules in high cost states, but enjoys more discretion to adjust the production schedule in low cost states. Moreover, the supplier is granted with more discretion when the buyer becomes more risk averse, but is restricted by more rules when the supplier becomes more risk averse or when the supplier's risk preference becomes private information.

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Section: Introductionmentioning

confidence: 99%

Optimal risk sharing with ex post private information: Rules versus discretion

Dai

2022

Southern Economic Journal

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“…Our research also relates to several studies on adverse selection with risk‐averse agents. Salanié (1990), Laffont and Rochet (1998), Dai (2008) and Arve and Martimort (2016) study the optimal contract with a risk‐averse agent who learns its valuation privately after contracting. These studies assume that there is no information asymmetry at the time of contracting.…”

Section: Introductionmentioning

confidence: 99%

Optimal sequential contract with a risk‐averse supplier

Dai

2021

Canadian J of Economics

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We study optimal contracts in environments where a risk‐averse supplier discovers cost information privately and gradually over time: the supplier is privately informed about its cost uncertainty at the time of contracting and discovers the realization of cost condition privately after contracting and before production. We show that both the buyer and the supplier prefer more cost uncertainty when the supplier is not very risk‐averse but less cost uncertainty when the supplier is sufficiently risk‐averse. However, the buyer always prefers to contract before the cost uncertainty resolves regardless of the supplier's degree of risk aversion. The nature of the optimal contract also depends on the supplier's risk preference. A separating contract is optimal when the supplier is not very risk‐averse; however, a pooling contract, which offers the same contract terms regardless of the cost uncertainty, can be optimal when the supplier becomes sufficiently risk‐averse. Moreover, the optimal production schedule is often characterized by “inflexible rules.”

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The illusion of “win–win” solution: Why environmental regulation in china promotes firm performance?

Jian

2020

Structural Change and Economic Dynamics

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Regulating a risk-averse firm under incomplete information

Cited by 3 publications

References 5 publications

Optimal risk sharing with ex post private information: Rules versus discretion

Optimal risk sharing with ex post private information: Rules versus discretion

Optimal sequential contract with a risk‐averse supplier

The illusion of “win–win” solution: Why environmental regulation in china promotes firm performance?

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