Year: 2019
Type: preprint
Abstract: We study the regulation of a monopolistic firm using a robust-design approach. We solve for the policy that minimizes the regulator's worst-case regret, where the regret is the difference between his complete-information payoff minus his realized payoff. When the regulator's payoff is consumers' surplus, it is optimal to impose a price cap. The optimal cap balances the benefit from more surplus for consumers and the loss from underproduction. When his payoff is consumers' surplus plus the firm's profit, he offers a piece-rate subsidy in order to mitigate underproduction, but caps the total subsidy so as not to incentivize severe overproduction.
Authors: Guo, Yingni, Shmaya, Eran
Institutions: Northwestern University, Northwestern University
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2979699412