Conferences at Department of Economics, University of Toronto, Canadian Economic Theory Conference 2025

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Providing Certainty

Andrew B Choi*, Christoph Schlom, Chengyang Zhu

Building: HEC Montréal - Édifice Hélène-Desmarais
Room: HEC
Date: 2025-05-02 11:00 am – 11:30 am
Last modified: 2025-04-28

Abstract


A principal chooses a policy at a future date, and wishes to match the policy to an uncertain state. An agent chooses when to make an irreversible investment, and wishes to invest only if he expects the policy will be favorable. Information about the state is publicly and gradually revealed over time. To incentivize the agent to invest early, the principal provides policy certainty. This is inefficient -- the agent's benefit from policy certainty is always outweighed by the principal's cost from reduced policy flexibility. Our results apply to green energy subsidies and procurement of vaccines.

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