0
$\begingroup$

It seems that there are some circumstances, say when the government foresees a financial crisis, where it would like firms to hedge, take less riesk etc. However, leveraged agents benefit from risk, and so they don;t benefit from risk eduction expenses.

Is there some theory or idea, out ther eon how to design a mechanism that incetivizes firms to reduce their riskiness? Maybe subsidize financial hedging? Maybe tax profits very progressively/convexly?

$\endgroup$
1
$\begingroup$

You could augment an externality mechanism, where people are punished for the effect they have on other people, and use a convex function or variance of outcomes. You could also transform their payoffs with a concave function to induce risk aversion. Look into the VCG mechanism and extensions for more info.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.