In contrast to insurance companies, regulatory authorities or regulators can obtain only limited information about the companies’ value. It hence leads to some effects on the regulation design, which is however often overlooked in the literature. This paper characterizes the limited/imperfect information as Knightian [1921] uncertainty (ambiguity). In order to stress the analytical effects of ambiguity on the regulation decisions, we firstly carry out an analysis in a standard immediate bankruptcy regulation where defaultand liquidation are considered as indistinguishable events. It is noticed that ambiguity-averse regulators require more “ambiguity equity”. We show then that under ambiguity an immediate liquidation policy delivers false liquidation with a positive probability. As anillustrative example to fix the false liquidation problem under ambiguity, a new regulation rule is developed with a regulatory auditing process. Based on this new model setup, wefocus on examining how the riskiness of the firm’s value and the debt ratio affect liquidation probability.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.

MEER OVER NETSPAR


Missie en strategie           •           Netwerk           •           Organisatie           •          Magazine
Netspar Brief            •            Werkprogramma 2019-2023           •           Onderzoekagenda

OVER NETSPAR

Onze partners

B20160708_dnb
svb
B20211216_shell download
B20160708_uva
B20200924_Ortec Finance logo 250px_banner_small
Bekijk al onze partners