Incentive Regulation Theory Under The Endogenous Information Structure

This dissertation relaxes the assumption of exogenous information structure in the existing theory of incentive regulation and tries to studies the problem of optimal regulation under endogenous information structure.The studies can be separated into two parts: static models and dynamic models. First of all, the basic static regulatory model under the endogenous infonnation structure is set up and the accordingly optimal regulatory contracts are given. Then this basic model is extended to the case that moral hazard is considered, and the optimal regulatory contracts are characterized. The static optimal contracts under the endogenous information structure are the piecewise functions with respect to the information acquisition cost of the firm and the standard optimal incentive regulatory contract is identical to the former when the infonnation acquisition cost lies within some certain range.In the second part the dynamic models under endogenous information structure are set up. In the field of studying multi-period regulations, the commitment power is one of the most important factors influencing the equilibrium. The dissertation studies the regulation problems under two different settings. One is the full commitment setting, which means that a long-term contract can be signed and implemented during the whole process of the regulation. The other is the limited commitment setting, which allows renegotiation about the initial contract under the agreement of the both;otherwise the initial contract will be implemented. In this part a two-period model under the full commitment assumption is established and the study shows that the optimal regulatory contracts is the piecewise function with the infonnation acquisition cost and have three forms: induces the information gathering in the first period, induces the information gathering in the second period or prevent the information gathering in both periods. Compared to the static optimal contracts, the dynamic ones are much more complex and will be affected by the value of discount factor. Then a model under the limited commitment assumption is set up and the study shows that the optimal renegotiation-proof contracts have two types with respect to the information acquisition cost: induces the firm to gather information and prevent the firm from gathering information.