Evatt, G.W. and Moriarty, J. and Johnson, P.V and Duck, P.W. (2011) Regulating Industries under Exogenous Uncertainty. [MIMS Preprint]
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Abstract
We present a quantitative method to find jointly optimal strategies for an industry regulator and a firm, who operate under exogenous uncertainty. The firm controls its operating policy in order to maximize its expected future profits, whilst taking account of regulatory fines. The regulator aims to control the probability that the firm enters a given undesirable state, such as ceasing production, by imposing a fine which is as low as possible, while achieving the required reduction in probability. The exogenous uncertainty is modeled using a stochastic differential equation, and we show this implies that the firm's behavior can be solved via the Hamilton-Jacobi-Bellman equation, and the regulatory fine can be obtained via the Feynman-Kac formula. We discuss both analytic and numerical solution methods. Our results are illustrated for a security of supply problem for vaccine production where future production costs are uncertain and, using empirical data, for an abandonment problem in a gold mining operation where future commodity prices are uncertain. The method determines the level of fine which establishes a Nash equilibrium in these nonzero-sum games, under uncertainty.
| Item Type: | MIMS Preprint |
|---|---|
| Additional Information: | Working Paper |
| Uncontrolled Keywords: | Regulation, Uncertainty, Nash Equilibrium, Early Termination, Mining,Vaccine Supply, Optimal Policy |
| Subjects: | MSC 2010, the AMS's Mathematics Subject Classification > 35 Partial differential equations MSC 2010, the AMS's Mathematics Subject Classification > 60 Probability theory and stochastic processes MSC 2010, the AMS's Mathematics Subject Classification > 91 Game theory, economics, social and behavioral sciences |
| Depositing User: | Dr Geoff Evatt |
| Date Deposited: | 25 Nov 2011 |
| Last Modified: | 08 Nov 2017 18:18 |
| URI: | https://eprints.maths.manchester.ac.uk/id/eprint/1708 |
Available Versions of this Item
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Regulating Industries under Exogenous Uncertainty. (deposited 15 Sep 2011)
- Regulating Industries under Exogenous Uncertainty. (deposited 25 Nov 2011) [Currently Displayed]
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