A yardstick competition approach to a multi-firm regulation problem under asymmetric information

This paper presents a study of multi-firm regulation problems under asymmetric information, using yardstick competition as a regulatory tool for the regulator to evaluate the cost level of the firm. A multi-firm regulation principal–agent model for the problems is then developed with the purpose of maximizing the expected social welfare under the incentive feasible mechanism. In order to solve the proposed model, its equivalent form is given and the sufficient and necessary conditions for ensuring the existence of the optimal regulatory policies are presented. Furthermore, we provide an optimal regulatory policy for a special case, where the output has finite first-order derivatives. An application in supply chain management is given to illustrate the effectiveness of the proposed model. The results demonstrate that the firms whose marginal costs are higher than the yardstick price have an incentive to lower their marginal costs.