Investment and Risk-Taking in Procurement and Regulation

Hubert, Franz

doi:10.2139/ssrn.366722

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Investment and Risk-Taking in Procurement and Regulation

Discussion paper 1999/14, Wirtschaftswissenschaftliche Dokumentation, Technische Universität Berlin

11 Pages Posted: 3 Apr 2003

See all articles by Franz Hubert

Franz Hubert

Humboldt University of Berlin - Faculty of Business

Date Written: December 1999

Abstract

This note analyses investment and risk-taking in a simple agency model of public regulation/procurement borrowed from Laffont & Tirole (1993). We show that the principal will overinvest or underinvest depending on whether investment is marginally more productive in bad or in good states. Due to the incentive problem investment risk will be avoided even though all parties are risk-neutral. Apparently, this 'excessive' risk-aversion extends to a large class of agency problems in organization theory and finance.

Keywords: Regulation, asymmetric information, investment

JEL Classification: L51, D82, H57

Suggested Citation: Suggested Citation

Hubert, Franz, Investment and Risk-Taking in Procurement and Regulation (December 1999). Discussion paper 1999/14, Wirtschaftswissenschaftliche Dokumentation, Technische Universität Berlin, Available at SSRN: https://ssrn.com/abstract=366722 or http://dx.doi.org/10.2139/ssrn.366722